
Qass. 
Book. 



THE BANK AND THE TREASURY 



"... About twenty-five years ago, Lord Revelstoke, at the head of 
the great firm [Baring Brothers], was visiting a German watering-place, 
where he met one of our leading American bankers. Naturally, their 
conversation drifted into a discussion of the financial situation, and in 
the course of the talk, Lord Revelstoke remarked that he intended during 
the next ten or fifteen years to enter extensively into modern financial 
banking. From that time the character of the business of the Barings 
began to change, and from being the greatest merchants in commercial 
credits, they put their resources more and more into fixed forms of 
investment, into speculative ventures in securities and into the promotion 
of financial enterprises. What was the result? In 1890 the . . . world 
was startled by rumors reflecting upon the credit of this house, hitherto 
considered invincible, and its failure was only averted by the most stren- 
uous efforts of the Bank of England, with the aid of the strongest bankers 
of London. . . . 

"We refer to this striking chapter in financial history simply because 
it illustrates one of the peculiar dangers of our own times. Unques- 
tionably, the special temptation to which our banks are now subjected 
is the temptation to turn from commercial to financial banking; to 
change from the buying and selling of commercial credit into investments 
in securities and loans extended to promote financial enterprises; in 
short to change their business from that of commercial banks to that of 
finance -ompanies. 

"The process of concentration in banking which is going on would 
possess little danger were it not accompanied in so large a degree by this 
change. The house of the Barings was a striking example of concen- 
tration in banking. Its business encircled the globe; its wealth was 
enormous, and so great were its transactions that even at the time of its 
trouble in 1890 its holdings of paper amounted to $100,000,000. But 
when it began to divert its interest, formerly directed almost exclusively 
to commercial credits, and began to throw the weight of its prestige and 
resources into the field of investment, speculation and promotion, then 
the power of its concentration of capital became a menace to the world. 
In the same way concentration in banking, which is going on at such 
rapid rate in New York, would not be open to much or any criticism if 
such concentration . . . was employed for the purpose of facilitating 
the commerce of the country instead of being used in purely financial 
undertakings." — The Wall Street Journal, New York, Oct. 29, 
1904. 



THE BANK AND 
THE TREASURY 

Bank Capitalization and the 
Problem of Elasticity 



BY 

FREDERICK A. CLEVELAND, Ph.D. 

Professor of Finance in the School of Commerce, Accounts 
and Finance, New Tork University 



NEW EDITION REVISED 



LONGMANS, GREEN, AND CO, 

91 and 93 FIFTH AVENUE, NEW YORK 
LONDON, BOMBAY, AND CALCUTTA 

I908 



.044 



Copyright 1905 
By Longmans, Green, and Co. 

All rights reserved 



First Edition, March, 1905 
Second Edition, Revised, March, 1908 



/3//*?r 



? 



The Plimpton Press Norwood Mass. 



INTRODUCTION 

When, in the early months of 1902, Mr. Shaw took the 
Treasury portfolio, the country was passing through a 
period of marvellous financial activity. Four years of 
commercial and industrial consolidation, four years of 
trading in new corporate issues, "on margin," had ab- 
sorbed hundreds of millions of banking capital in specu- 
lation. Moreover, this encumbering of current funds 
had taken place at a time when commercial and industrial 
expansion was multiplying its demands on our banks for 
credit accommodation. True, on May 9, 1901, an unex- 
pected corner in Northern Pacific had brought speculation 
to a temporary standstill. But the quiet which fol- 
lowed had been utilized by the large banking interests to 
get together needed financial support with which to launch 
United States Steel and other new gigantic promotions. 
From two to three thousand millions of new issues had 
to be digested and assimilated by the investing public be- 
fore our institutions of commercial credit could sufficiently 
relieve themselves from speculators' loans to meet the 
growing demands of trade. 

After 1898 the financial situation was at all times 
pregnant with danger to business. So large was the pro- 
portion of new flotations carried on bank credit, that in 
the early months of 1902 conservative financiers became 
alarmed; serious question was raised as to what the out- 



vi INTRODUCTION 

come would be. The fear expressed was that the bank- 
ing capital of the country was overloaded with credit 
obligations of a most dangerous sort. Within six years 
the national banks had increased their demand obligations 
to individual depositors more than $1,600,000,000, while 
during the same period their capital (both subscribed and 
earned) had increased only $135,000,000. That is to 
say, for every additional dollar put into the national 
banking business during this period, $12 of credit in the 
form of new deposit accounts had been issued against it. 

At the time that the national banks were thus extending 
their credit obligations, similar expansion was taking 
place in the deposit obligations of state banks, private 
banks, and loan and trust companies. They had in- 
creased their demand credit over $2,000,000,000, while 
the new capital added to the business was only $235,000,- 
000, making a total expansion in deposit accounts of 
$3,600,000,000, with a total increase in capital of $370,- 
000,000. The amount of credit expansion in bank 
accounts alone — i.e., expansion in the forms of cash 
with which business is done — was equal to about two 
and one-half times the total money circulation of the 
country outside of the reporting banks, while the total 
increase in banking capital was only about one-seventh 
of the money stock of the nation. 

To the end of aiding the banks to meet increasing 
money demands, Secretary Gage had used the customary 
methods of relief. He had refunded the bonded debt 
on a lower investment basis; he had made numerous 
purchases of bonds for retirement; he had made interest 
payments in advance ; he had added to the relief thus given 



INTRODUCTION vii 

by loaning to the banks some $80,000,000 in the form of 
revenue deposits. Such was the situation when Mr. 
Shaw came to the cabinet. 

Panics Averted by Government Loans 

Within the next few months pressure on the banks 
was extraordinary. The climax was reached in Sep- 
tember and October. Then it was that Mr. Shaw 
broke away from all precedents and issued his famous 
order that savings bank investments be received as security 
collateral to additional revenue deposits. This first order 
was soon followed by another, which relieved the banks 
from the necessity of holding a twenty-five per cent 
reserve against the secured deposits of the government. 
The effect of these two orders was to increase loans of the 
government to the banks from $113,000,000 to $166,000,- 
000 — producing a temporary result in financial circles 
much the same as if $50,000,000 of new capital had sud- 
denly been added to the banking business. 

During 1903 the financial stress of 1902 was gradually 
reduced. By concerted action of banks, by the continued 
aid of the government, by the imposition of high interest 
rates on bank accommodations and by demands for 
added collateral to margins forcing liquidation, the over- 
encumbered capital of banks in financial centres was 
again somewhat relieved. These acts of conservatism 
were followed by months of wholesome trading, during 
which time speculation played the smaller part. 

The latter part of 1904 and the years 1905 and 1906 
was another period of dangerous credit expansion. Dur- 



viii INTRODUCTION 

ing 1904 clearing house transactions of the United States 
amounted to $102,000,000,000. The clearings for 1905 
were $140,000,000,000. The following year, 1906, they 
reached $157,000,000,000. December, 1906, was a month 
of high tension at the financial centre, to relieve which 
call money sales were advanced to 36 per cent; the average 
of call rates for the month was about 14 per cent; thirty 
days money commanded from 9 per cent to 15 per cent. 
During a few days of the January following, as high as 
50 per cent was paid for call money. This was followed 
by two months of comparative quiet. In March, 1907, 
however, speculative trading and holdings on margin 
had again reached such proportions that in efforts to pro- 
tect themselves, the banks were forced to call, and in a 
single day the market price of securities dropped from 
5 to 20 points. General prosperity and prompt relief 
from Washington alone saved our commercial and in- 
dustrial institutions from distress similar to that recently 
experienced through the sudden contraction of bank- 
credit. 

It was during this period of rapidly increasing business 
activity and rapidly expanding bank-credit, and in antici- 
pation of a sudden need for increased support to bank- 
credit obligations, that Secretary Shaw rendered another 
signal service to the country. He saw the approaching 
storm and prepared for it by getting the Treasury in con- 
dition to come to the rescue of the country when the banks 
would be unable to meet obligations for payment without 
wholesale reduction of credit accommodation. In the 
first place, payment on the Panama Canal purchase was 
made by withdrawals of the deposits of the government. 



INTRODUCTION IX 

diminishing by this amount the demand loans of the 
Treasury to the banks, and the consequent inducement 
to banking extravagance. After making the Panama 
settlement — to provide for which a 20 per cent call had 
been made, — the Treasury deposits were about the same 
as when Mr. Shaw had been appointed to the cabinet 
three years before. Further than this, the Secretary gave 
notice to the banks that a call would be made, first for 
25 per cent, and later for 50 per cent of the balance of 
Government deposits, and although these demands were 
not enforced to the letter, by November of 1905 the 
demand obligations of the banks to the Government were 
reduced to $50,000,000. Thus it was that, by the time 
the banks in financial centres had again reached the 
danger point of credit expansion, Mr. Shaw was able to 
come to the support of the money market; and during 
the latter part of 1906 and the early months of 1907, 
$120,000,000 in the form of additional deposits were 
loaned to the banks without embarrassing the Treasury, 
enabling them to maintain their money-reserves without 
seriously contracting business accommodations. 

After the immediate need for collateral supports to the 
banks had passed, Secretary Cortelyou announced that 
he would follow the same general policy as had been 
pursued by his predecessor. But during the months 
from May to November the demand of the banks for 
money with which to maintain their reserves constantly 
increased. Protests were made against reducing the 
Treasury balances that had been loaned to the banks to 
tide over the stress which came earlier in the year. 

Yielding to these importunities was a serious mistake. 



X INTRODUCTION 

Instead of calling attention to the capital weakness of the 
banks, the Government permitted them to continue to 
use the large Treasury balance without interest. The 
banks found that it was not necessary to increase their 
own capitalization; in fact, the Government held out an 
inducement not to increase their capital, since the present 
stockholders were able to increase their income by the 
amount of the credit expansion supported by the Treasury 
balance, without being required to share their increased 
profit with new stockholders. Not only were the banks 
themselves weakened by continuing aid, but the Govern- 
ment was placed in a position where it could not lend a 
strong helping hand in future emergencies. 

The October and November Panic 

When in October and November, 1907, panic days 
again were reached, the Government at Washington 
could not respond with the liberality required. In May 
$170,000,000 had been reached. August 22, this amount 
had been reduced to $143,000,000. August 23, the Sec- 
retary began increasing Treasury deposits with the 
banks in response to urgent demands. November 11, 
$70,000,000 had been added to the Treasury loans and 
during the following month practically the whole avail- 
able surplus of the Treasury was placed at the disposal 
of the banks. But even this did not suffice to support 
the weight of obligations that had been permitted to 
accumulate on the crumbling foundations of the credit 
institutions of the country. 

The alternative was a violent credit contraction. The 



INTRODUCTION xi 

essential weakness, a first cause of credit collapse, is found 
in the changed relations of credit outstanding to capital 
supporting it. In 1897 the proportion of National bank 
capital to individual deposit obligations had been as 1 to 
2.93; in 1906 their proportions reached 1 to 5.03. In 
1897 the proportion of capital, surplus, and undivided 
profits to individual deposit obligations was as 1 to 1.92; 
in 1906 this proportion reached 1 to 2.79; in 1897 the 
proportion of money-reserves held by National banks to 
individual deposit obligations was as 1 to 5.35; in 1906, 
even counting all the money borrowed by the banks from 
the Government and from State and private banks and 
trust companies, this proportion had reached 1 to 6.71. 

The institutions chartered by the Government to supply 
credit accommodations to the business public had been 
permitted to grow top-heavy. Worse than this; not only 
was it permitted that they issue a dangerous proportion 
of demand credit to capital and money supporting it, but 
as has been commonly asserted and not denied that the 
character of commercial assets purchased by the banks 
by means of this credit was even more dangerous — a 
large part of the demand-credit having been issued in 
exchange for paper secured by collateral which had been 
purchased "on margin," the market price of which was 
gradually depreciating. As fast as prices depreciated 
the demands of bankers for additional collaterals be- 
came more tense. The net result was to force sales, 
thereby further to depress the market. In cases where 
speculators reached their limit, they made special 
pleas to the banks for "time," till the market might 
change. 



xii INTRODUCTION 

The Capital Weakness of Central Banks Revealed by 
Commercial Demands from the Interior 

The increasing demands from the commercial and in- 
dustrial constituency of the vast interior forced the issue. 
When the country banks began to call the loans which 
they had made to the reserve banks, when the reserve 
banks, in turn, were forced to call their loans to the great 
central reserve banks that had used these loans for money- 
reserves with which to support credit accommodations 
to speculators, then it was that the mutual props in the 
form of " legal reserves" began to give way, and the 
whole business constituency which depended on bank- 
credit for cash was thrown into a condition of distress. 
The resulting condition was what Mr. Ridgley has re- 
ferred to as the loss of confidence of banks in each other. 
To save themselves the central reserve city banks had to 
issue clearing-house certificates, which is a form of sus- 
pension of specie payments. This protective measure of 
the central reserve bank forced the banks the country 
over to do likewise. Mutual obligations within each 
community were settled by means of clearing-house 
paper. 

Relief finally came in the only way possible, through 
added capitalization. This capitalization, however, was 
only temporarily supplied. It was furnished by a syndi- 
cate of which the house of Morgan & Co. was the head. 
The government also added all of its remaining surplus 
available. A broader basis for credit liquidation was 
established through the importation of approximately 
$65,000,000 in gold, a large part of which was procured 



INTRODUCTION xm 

by means of this new temporary capitalization furnished 
by the syndicate. But the reduction of the demand- 
credit used as "cash" in commerce and industry was far 
greater than either importation or money issue could 
supply — a contraction of the credit-circulating medium 
which resulted in reduction in prices, temporary receiver- 
ships, and wholesale stagnation of business. Never has 
there been a more tragic financial situation. Only the 
general prosperity of the commercial and industrial 
world saved us from the worst of business calamities. 

By the end of the year 1907 the credit stress was in a 
measure abated. This was in part due to importation 
and in part due to the largely decreased business de- 
mands resulting from receiverships and liquidations 
forced on by the sudden withdrawal of hundreds of millions 
of dollars of banking accommodations which had been 
previously extended to legitimate enterprises. The 
remedy applied was drastic, wrecking the fortunes of 
thousands of persons engaged in useful employment. 
But the fundamental weakness of the system still remains 
to be dealt with. If collapse may come at a future time 
less prosperous than the present, failing credit may work 
still greater havoc. 

Dangers in the Present Readjustment 

The present readjustment is essentially a dangerous 
one. Not only is the added capital a temporary support, 
but in its method of application it is dangerous. Prac- 
tically the whole Treasury surplus is tied up in the settle- 
ment. January 1, 1908, the banks were owing to the 



xiv INTRODUCTION 

United States Treasury, either in the form of direct loans 
or as deposits of disbursing offices, about $256,000,000. 
A part of this the government needs at once to meet its 
current expenses. By a continued policy of loaning the 
Treasury surplus to the banks, without interest, by per- 
mitting the banks to retain a large part of the loan as 
money- reserves for the support of obligations to the de- 
positors during times of credit expansion, by permitting 
the banks to find relief in added loans from the Treasury 
and in a temporary syndicate, a plan of reorganization is 
accepted which does not take care of a large floating 
debt, and which does not provide adequate working 
capital. Another element of weakness is found in the 
fact that while the syndicate loans bear a high rate of 
interest, the loans of the Government are without interest. 
The syndicate loans, therefore, will be paid as rapidly as 
possible, while the government will be further importuned 
not to reduce its balances. In case it may happen that 
the country banks may again loan their reserves to the 
reserve banks, and the reserve banks may in turn loan 
their reserves to the central reserve banks, in sufficient 
amount, then the government may be able to gradually 
call its loans. But with the first considerable pressure 
brought to bear on the system, the experiences of last 
March and of last November may be repeated. 

Alternatives before the Government 

As a result of the present adjustment the Government 
is placed in a position such that one of three courses is 
open to it: (1) It may demand payment of loans to the 



INTRODUCTION XV 

banks with the possibility of disrupting the whole fabric 
of private credit based on the present reserve : (2) it may 
permit the banks to use its funds without interest, and 
borrow money at interest with which to meet its own 
current expenses; (3) it may, by charges of high rates of 
interest to the banks for loans in the form of deposits and 
bank notes, issued on collaterals deposited with the 
Government (or by other effective measures) force the 
banks to add sufficient permanent capital to their busi- 
ness to enable them to meet all their present emergency 
capital obligations, and at the same time insure the 
safety and stability of their own credit-accounts. In this 
situation President Roosevelt has appealed to Congress 
urging that the last of the three courses be taken. His 
specific recommendation, however, is confined to note 
issues. It remains for some one in authority to seriously 
propose a measure which will effectively apply the same 
regulative principle to the loans of the government to 
banks in the form of " deposits." 

Within the first six weeks of the present Congress sev- 
eral bills were introduced which provide for an interest 
charge on the loans. In the House, Mr. Fowler (H. R. 
12,677) an d Mr. Keifer (H. R. 208) proposed that banks 
be required to pay two per cent on government deposits. 
That such a measure would prove ineffective to cause 
banks to return government ''deposits" after an emer- 
gency was past, is amply proved by some forty years of 
experience with reserve loans. At such a rate, banks 
have never been known to return reserve deposits until 
"called." In the Senate two bills have been introduced 
which aim to make "deposits" emergency loans, but whose 



xvi INTRODUCTION 

defects are apparent. Senator Culberson (S. 3026) would 
have banks pay two per cent from August 1 to Novem- 
ber 30, four per cent from December 1 to March 31, 
and six per cent from April 1 to July 31 each year. 
This proposal assumes that money demands and credit 
disturbances regularly follow the seasons, an assumption 
which might do much to produce expansion and contrac- 
tion at the wrong time. The banker is in the best posi- 
tion to know when money demands are such that he can 
afford to pay six per cent for government loans, and 
these are times when the credit circulation should be 
increased or when more money is needed to support that 
already outstanding. Senator Piatt's measure (S. 108) 
would make the rate discretionary. This might prove 
effective and without public danger if a minimum of 
about six per cent were established to insure the use 
of the government loans for purposes of steadying the 
market in time of extraordinary demand. If the banks 
had the opportunity of borrowing from the government 
on proper security at six per cent and the government 
had the option of supplying funds either in the form of 
gold or paper money to be issued by it, the money rate 
could never rise far above the established minimum. In 
such event there would be no limit to the possibilities 
of expanding credit when needed, except the limits 
of adequate security for the loans among prospective 
borrowers. 



INTRODUCTION xvii 

Our Hopeless Philosophy of Panics 

Those who have expressed opinion concerning the cause 
of the recent panic used the same fatalistic philosophy as 
was employed centuries ago in accounting for ravages of 
"black death" and the scourges of smallpox and cholera. 
From time immemorial the same conclusions have been 
reached; after learned discussion, those in position to 
command respect for knowledge of financial situations 
have each time announced that sudden collapses of 
bank-credit have been due to an undefined, intangible, 
uncontrollable something called "lack of confidence." 
Comptroller Ridgley by a process of induction has given 
a new interpretation to this vague theory by asserting 
that the conditions which led to the panic of last October 
and last November were due "not to lack of confidence 
of the people in the banks, but more to lack of confi- 
dence of the banks in each other." 

With such a diagnosis of the malady by those who are 
looked to professionally for prescription of remedies, 
question may be raised as to whether we may ever hope 
to find relief from financial ills. May we hope to correct 
a financial disease that is diagnosed as the result of a 
mental attitude of persons who may not be located and 
specifically treated? Congress is asked to pass remedial 
laws. What legislation will make business safe as against 
"what some people may think"? How may bankers 
be required to conduct their business to prevent "some 
people" from losing confidence? Does not such an 
analysis suggest that the philosophy of banking is still 
surrounded by the ignorance and mysticism of the dark 



xvlii INTRODUCTION 

ages, and that public inquiry is still lacking in method of 
scientific research? 

Time was when a land-slide was attributed to the 
mental attitude of an evil one; when the breaking of a 
bridge or the falling of a building was considered as the 
inscrutable act of some great destroying force. The 
remedy proposed for such calamity is similar to that at 
present urged to relieve business, viz.; self-sacrifice and 
prayer as a means of restoring lost faith in an influence 
for good — acquiring a belief which has the power to 
protect the people against the intrigues of the devil. 
Since the days of the South Sea Bubble, this same mys- 
tically vague remedy has been proposed for protection 
against the collapse of bank-credit. Let us have con- 
fidence! Restore our faith and we shall be saved! 

A Plea for a Scientific Method of Determining the Charac- 
ter of Banking Legislation Needed to Protect the 
Public from Panics. 

In the search for causes of structural collapse, we have 
come to apply scientific standards to judgment. Were 
the tower of the Capitol building to show signs of weak- 
ness during a storm, the Government would not rest con- 
tent to set up props till the storm had abated. Were a 
great office building of New York to fall, no one would 
think of the prayer of faith as protection against future 
evils to be suffered from collapses of similar kind, or of 
importuning Omnipotence for justice to those responsible 
for loss of life and property. Inquest would immediately 
go to the character of materials and workmanship used in 



INTRODUCTION xix 

construction. Neither would there be mystery or fatalistic 
philosophy woven about legislation proposed for future 
safeguards to the community; nor would it be accepted 
as satisfactory defence of building management that those 
in control had yielded to the importunities of persons 
wishing accommodation, and as a consequence the build- 
ing had been built too high or had been over-crowded, or 
had had a "run" on it that carried it and the tenants to 
destruction. If the structure had been used for pur- 
poses other than those approved, or if the owners had 
connived with officials, or officers of the law had per- 
mitted the superstructure to be carried beyond the point 
of safety, if the foundation had been overloaded and had 
crumbled beneath the weight, or if a superstructure had 
been erected of such physical parts as to endanger tenants 
or the public, under any and all of these circumstances 
tenets of scientific inquiry, premised on experience, would 
guide in determining responsibility for loss, as well as in 
the shaping of legislation for the correction of similar 
evils in other structures built or to be built. 

In engineering and architecture, as well as building 
ordinances, the guiding principle is : The greatest economy 
compatible with safety. But whatever the cost, founda- 
tion and materials must be of such strength and quality 
as to make the structure safe. In estimating the depth 
and breadth of foundation, or the strength of materials 
to be used in any part of a building, a liberal margin of 
safety is allowed to provide for strain greater than any 
that may ever be brought to bear. Should a bridge be 
under contemplation, then calculations as to the load or 
strain would depend on the character of use. After the 



XX INTRODUCTION 

bridge was completed traffic regulations would be framed 
to protect the public from danger of overloading, and 
the management would be held responsible for violations. 
Police control would also be exercised to prevent catas- 
trophe. 

Legislation Based on Ignorant Assumption may Increase 

the Danger 

Much of the legislation proposed to prevent collapses 
of bank-credit throws this kind of reasoning to the winds. 
The drift of opinion has been away from the theory of a 
coefficient of safety. The banking world is urged by 
public officials to make a still higher use of structural 
materials, i.e., to make such adjustments between them- 
selves as will permit the same capital to carry a larger 
load. No attempt has been made to calculate what 
burden a particular credit structure may bear without 
endangering the business public from credit contraction. 
The argument has been further to reduce the capital cost 
of banking. In estimating this, no account is taken of 
the cost to the community of the periodical wholesale 
demolitions and the wrecking of other business which 
have been induced by the banks to depend on them for 
current funds. The banks may be safe. Yes! But 
what of the many business interests that have come to 
rely on bank-credit for "cash"? There seems to be an 
utter blindness to the public aspects of banking; no 
reckoning is taken of the fact that the forced con- 
traction of the credit of even the smallest of banks may 
cause greater loss and suffering to a community as a 



INTRODUCTION xxi 

whole than would the collapse of the largest of physical 
structures. 

In the safety of a building structure the public is in- 
terested as a matter of physical protection to tenants and 
passers-by. Increased charges for rent due to capital 
cost required to obtain this protection is not accepted as 
reason for permission to build an unsafe edifice. At every 
cost, public safety is insisted on. In the safety of a bank 
it is not physical safety alone that is involved. The 
business, the fortunes, the life work, possibly the lives of 
all those who have made arrangements for their current 
financial needs, are directly at stake. Indirectly, a sudden 
contraction of bank-credit to protect the bank itself from 
collapse may unsettle well-founded business judgments, 
and produce conditions which may cause business con- 
cerns, not in any manner connected with the particular 
institution which institutes the measure, to topple to ruin. 
Indirectly, the business interests of a whole community 
or of a nation may be affected. 

Is it not worth our while to proceed in the determina- 
tion of questions of banking regulation on the theory that 
no capital cost is too great if it is necessary to protect the 
community against sudden contractions of bank-credit? 
May not the same principle of scientific inquiry be applied 
to the discovery of a margin of safety to prevent collapses 
of credit as has been applied to building structures? 
Of far greater importance to the welfare of the community 
is it that bank-credit shall not be constricted in time of 
need; of far greater importance that the capital founda- 
tion shall be adequate to support every dollar of credit 
issued by banks, so long as the credit may be needed 



xxn INTRODUCTION 

by the borrower; of far greater importance that a liberal 
margin of safety shall be required as against extraor- 
dinary strain. 

Would it not seem the part of wisdom for public men 
and public bodies to pass laws to prevent the overloading 
of the capital foundations of credit institutions, and over- 
accommodation, rather than that the Government shall 
be content to permit banks to extend their credit ad 
libitum? Is not legislation which requires the bank to 
do a safe business preferable to the administration of 
palliatives to the injured, or reliance upon the ability of 
the Treasury to prevent disaster by running to the sup- 
port of toppling credit walls as a means of relieving finan- 
cial institutions from the necessity of increasing the 
capital cost of doing business ? 

Elements of Certainty in the Problem of Elasticity 

In this relation it is suggested that banking and credit 
are just as susceptible to scientific analysis as are build- 
ings and building materials. With all the mystery that 
has been woven about the subject, every feature and 
element in the problem of elasticity of bank-credit is as 
capable of exact determination as are the tensile strength 
of iron, the crushing resistance of stone, or the wind 
strain on an office building. In law there is none of 
the mysticism about credit which is commonly assigned. 
Credit is an unconditional contract for the payment of 
money, nothing more, nothing less. So clear is the law 
on this point, that it has been repeatedly decided that any 
other form of contract or transaction is not credit. In 



INTRODUCTION xxin 

business practice there is absolutely no uncertainty about 
what credit is. Every business man knows that if he be 
creditor he can insist on the payment of the amount and 
kind of money contracted for, and that nothing else may 
be substituted except by his consent, which amounts to 
a new contract. If he be debtor, he knows quite as well 
that he must obtain and deliver the money in the amounts 
and at the time contracted for, or in default of such 
delivery the courts may be asked to intervene and sell his 
entire estate if need be to procure this money. In the 
common parlance of the street, credit is a " short sale" 
of money; this sale is governed by practically the same 
rules as a "short sale" of bonds or a " short sale" of 
wheat. The only alternative to " delivery" is "settle- 
ment," or the substitution of a new contract for the 
original credit contract. 

There is nothing mysterious about bank-credit. This 
is a contract entered into by a banker with his customer, 
called a depositor, or with the holder of the banker's note. 
The contract is one for the delivery of a definite amount 
of legal-tender money on demand; if the creditor of the 
banker be a depositor, then the evidence of the credit 
contract is a memorandum of account on the books of 
the bank and a corresponding memorandum kept by the 
customer in his own cash-book. It is a common credit 
relation — there is no uncertainty about it. It is identi- 
cally the same kind of a contractual relation as a demand - 
credit on the books of a manufacturer. In discussing 
the question of bank-credit therefore we may speak in 
exact terms, without any doubt or misunderstanding. 

The mysterious word "confidence" may also be re- 



xxiv INTRODUCTION 

solved into exact terms. Analyzed, to its constituent 
elements, what has been so vaguely spoken of as " con- 
fidence " may be clearly defined. In banking relations 
that which has been called "confidence" is a conclusion 
or judgment arrived at with respect to the value of a credit 
contract at the time that the contract is made, or a sub- 
sequent judgment which reflects itself in the exercise of 
the option under the contract to demand payment. 

To illustrate: A merchant takes in $1,000 of legal- 
tender money over his counter. He carries this money 
to a nearby bank and exchanges it for a credit of $1,000, 
a memorandum of which is entered in his pass-book, as 
well as the customers' ledger of the bank. The merchant 
does this because, at the time he makes his " deposit," it 
is his best judgment that he would rather have the obliga- 
tion of the bank to pay him $1,000 on demand than to 
have $1,000 in lawful money. If this were not his best 
judgment he would not have made the change. "Con- 
fidence" in the bank means that for his own purposes he 
values $1,000 of unsecured credit of this particular insti- 
tution more highly than he values $1,000 of gold coin of 
the United States or other currency. 

The reason why the merchant has "confidence" in the 
bank is just as susceptible of analysis as is the definition 
of what constitutes "confidence." Why does he value 
the contract of the bank to deliver money at a future date 
more highly than money itself? The customary answer 
shows the inconclusiveness of the present method of 
approach. We are vaguely told that it is because the 
merchant has "confidence." That is to say, the mer- 
chant has "confidence" because he has "confidence," 



INTRODUCTION xxv 

and conversely, he does not have "confidence" because 
he does not have "confidence." Upon analysis it is 
found that the merchant's judgment as to the value of 
the bank's credit is premised in three other conclusions: 
(i) that "the banker is honest" — which being inter- 
preted means that, in the opinion of the merchant, the 
banker will do all in his power to meet his credit con- 
tracts on demand without resort being had to the court 
to enforce them; (2) that in the opinion of the merchant 
the banker is conducting his business in such manner that 
he will be able to fulfil every promise made by him to 
deliver money on demand according to the terms of his 
contracts; (3) that, in the opinion of the merchant, all 
persons with whom he currently deals have, or will have, 
also arrived at the same conclusions as has he with respect 
to the banker's honesty and paying ability. 

It is in facts or conditions which warrant or fail to war- 
rant the second of these conclusions that the chief ele- 
ment of public danger lies. Small loss has been suffered 
from mistaken judgments in arriving at the first con- 
clusion — the honesty of bankers. Reputation for honesty 
is brought to a test with each transaction. A single 
transaction which shows dishonesty will destroy all pos- 
sibility of further sales of credit — in other words, will 
destroy the business of the banker. Dishonesty eliminates 
itself from the banking business. For protection against 
dishonesty little or no legislation is needed. Neither can 
legislation be made effective with respect to the third 
conclusion. Legislation cannot compel a trading public 
to accept the credit of any particular institution or class 
of institutions in exchange. It is with the second con- 



xxvi INTRODUCTION 

elusion only that laws may effectively deal, and in the 
character of dealing with this lies the whole problem of 
elasticity and the safety of our financial system. The 
conditions under which the banker is permitted to offer 
his credit for sale, the manner in which he shall conduct 
his business, the amount of capital required, the character 
of equipment in which his capital shall be invested, the 
amount of obligations to depositors that he will be per- 
mitted to incur to each dollar of capital invested in the 
business, the amount of minimum cash required, the con- 
ditions under which he will be permitted to loan to and 
borrow from other banking institutions, the conditions 
under which he will be permitted to obtain aid from the 
government, the character of business to which he will be 
permitted to extend credit, the character of assets he will 
be permitted to buy in exchange for demand-credit, 
every phase and aspect of his business which enters into 
the customer's judgment as to ability to pay, are subject 
to the most exacting regulation and critical current ex- 
amination of public officers. 

It is also in factors of this class that every question 
having reference to panics, runs, collapses of credit, credit 
expansion, credit contraction, and increased and de- 
creased demand for money relates itself. These factors 
are also subject of record and current report and may be 
classified and summarized for purposes of exact deter- 
mination of elements of strength and weakness, of safety 
and public danger. Not only may instruments of pre- 
cision be used in the diagnosis, but each remedial reagent 
may be scientifically tested in its application. 



INTRODUCTION xxvn 

The True Function of a Bank 

Critical analysis and regulative measure must have 
reference to the function and purpose of the commercial 
bank. This factor of the problem also leaves no room 
for uncertainty. The business of a commercial bank is 
essentially the business of selling its own credit for the 
money and commercial paper offered in exchange for this 
kind of "cash." The high value set on the convenience 
and economy of bank-credit as "cash" for use in the 
making of purchases and payments has caused business 
men to take nearly all the money and commercial paper 
received by them in their own business to the bank and 
to offer them in exchange for the bank's credit-accounts. 
The check and the draft are simply the instruments by 
which the bank's customers demand payment, or transfer 
certain portions of their bank- credit to others — these 
transfers being accepted in lieu of money. Selling stocks 
and bonds, underwriting the purchase and sale of cor- 
porate issues, collecting, the purchase and sale of coin 
and bullion, are not banking. They may be incidents or 
accessories to the business, but any one or all of these 
functions may be exercised by those who have no powers 
to engage in the business of banking. 

From the point of view of ability to pay demand obliga- 
tions, money is the only equipment needed by a bank. 
With the question of profit eliminated, the only form in 
which a bank need carry either capital or deposits would 
be legal-tender money. From the point of view of mak- 
ing a profit out of the business and at the same time of 
conserving its money-paying ability when money is de- 



XXV1U INTRODUCTION 

manded, the banker seeks to keep all his capital, as well 
as the money received in exchange for his credit, invested 
in income-producing assets which are readily converted 
into cash when needed. If the capital of the bank alone 
were held as reserves for the meeting of demands for 
money, the business of the bank would be to exchange its 
own credit or the money and other cash assets, obtained 
in exchange for its credit, for commercial paper. Were 
the entire capital not currently needed as money-reserves, 
then the portion not currently needed may be invested in 
such manner that the investments may at all times be 
converted into money without loss, and without waiting 
for maturities. So considered the business of banking has 
two distincts sides — viz., a credit trading side and an 
investment side. 

What Amount of Capital is Required to make a Bank Safe 

Accepting the only logical definition of capital — viz. — 
funds or property contributed by shareholders or other 
proprietors for the purpose of providing an enterprise 
with the resources or equipment permanently or con- 
tinuously necessary to the safe and successful operation 
of the business, and again we are on scientific ground. 
Again the problem of elasticity lends itself to exact analy- 
sis. The profits of a bank, as such, are derived from 
sales of its credit. The amount of its banking profit 
depends on the amount of its credit it can exchange for 
money and other cash or income-producing assets — or, 
to use the parlance of bankers, on the amount of its 
"deposits." The equipment necessary to the highest 



INTRODUCTION xxix 

success of a bank is such an amount of money held "in 
reserve" as is necessary to meet demands for payment 
on all the credit which it is able to sell — or again, to use 
the parlance of bankers, a money-reserve large enough to 
meet the demands of depositors. The amount of capital 
needed by a bank, therefore, is such amount as is neces- 
sary to provide it with its office equipment and with an 
adequate money-reserve. If the capital of a bank is not 
sufficient to do this with safety, then it is under-capi- 
talized. Under such circumstances, the bank would be 
in much the same situation as a railroad that is carrying 
a part of its construction on floating debt, or a manufac- 
turer who has supplied himself with machinery by means 
of demand loans. If his current loans are called he must 
sacrifice some of his product or current business to meet 
them and possibly be forced to sell his plant also. 

This does not mean that a bank which does not capi- 
talize all its equipment, including its money-reserves, is in 
danger of insolvency. A bank as well as a manufacturer 
may at all times be solvent and may so conduct its busi- 
ness as to meet every credit-obligation without a dollar 
of capital. If it rents its banking room and furnishings, 
if it invests its credit in money or other assets that may be 
quickly converted into money without loss, it may meet 
all obligations, provided the income on its loans is suffi- 
cient to pay expenses. But such a bank is in a position 
at any time to lose its business by being forced into liquida- 
tion. In other words, it cannot fall back on a capital 
fund to protect its deposit obligations, and, therefore, as 
was the case with many institutions in the recent panic, 
it may lose its depositors while other institutions that are 



xxx INTRODUCTION 

able to protect all credit-obligations without forcing loans 
will get them. 

What is the Public Interest in Bank Capitalization! 

The bank is not the only one to suffer from lack of 
capitalization. The customer is vitally interested, so 
vitally interested that the bank always makes a point of 
advertising the amount of its capital as an inducement 
to the customer to buy. The public as a whole is in- 
terested for the further reason that banking capitalization 
is one of the prime factors in elasticity both of the volume 
of money and of credit. Public interest in the capital 
equipment, therefore, may be said to be twofold: 

i. Each individual is interested in the bank as an in- 
stitution chartered to provide a convenient form of "cash." 
The one who sells his note or his money to a bank in 
exchange for its deposit obligations does so by reason of 
his desire to provide himself with current funds in con- 
venient form, needed for his immediate uses. In estab- 
lishing a banking relation, therefore, he desires to deal 
with an institution that can safely sell sufficient credit to 
meet his current financial wants. For the same reason, 
it is his desire also to deal with a bank that at all times is 
able to maintain the account which he has contracted for 
without calling his loan or diminishing his accommoda- 
tion, so long as accommodation is needed, provided he 
has good commercial paper to offer in exchange 

2. The public at large is interested in the manner in 
which banks are managed on account of the effect which 
a rapidly increasing and decreasing volume of available 



INTRODUCTION xxxi 

cash has on prices. By reason of the medium of exchange 
being so largely in the form of bank- credit, instead of 
money, the country at large or the combined business 
interests of the community and of the nation demand that 
there shall not be an expansion of bank-credit which can- 
not be supported so long as the current funding need 
which created the credit is present; and conversely, that 
there shall not be sudden contractions in the medium of 
exchange brought about by efforts of banks endeavoring 
to convert needed business accommodations into money 
to enable them to make deliveries on deposit obligations. 
It is such a condition as this that prevails in time of 
panic, and these are the conditions that should be met 
by adequate and safe capitalization. By application of 
methods of research, it is entirely possible to know whether 
the past emergencies could have been met if the banks of 
the United States had been required by law to capitalize 
their equipment, including their legal reserves. We would 
also be able to reach a scientific conclusion as to whether 
much of the present danger might be avoided if banking 
reserves were not tied up in loans to speculators "on 
margin." 

Conclusions that Have Been Reached as a Result 
of Experience 

As a result of the experience of the last few decades, 
and of reflection on the numerous collapses suffered in 
institutional credit, certain conclusions have been reached 
that may be said to be generally accepted. These are as 
follows : 



xxxn INTRODUCTION 

i. That the dominant demand in time of credit strain 
is a demand for money which the banks are unable to 
supply except at the expense of a very great contraction 
of commercial credit; 

2. That the present law which permits the issue of 
bank-notes was framed for the purpose of stimulating a 
favorable market for government bonds; that at the time 
of the formulation of the National Bank Act no thought 
was given to making either the currency or the bank- 
credit circulation elastic, and that some provision 
should be made for increasing the elasticity of the cur- 
rency as well as for increasing the elasticity of bank- 
credit; 

3. That the means employed by the Government for 
encouraging the banks to invest in Government bonds 
(viz., permitting them to hypothecate the bonds purchased 
for their par value in notes, without the payment of in- 
terest on such notes sufficient to keep them out of circula- 
tion in times when they are not needed) encourages the 
banks to encumber their capital to such an extent that 
they are unable to obtain notes from the Government 
when needed except by borrowing government bonds 
from savings banks and other investment institutions; 
and that under the operation of the present law the only 
effective relief which may be given by the Government 
to relieve money-demands on the banks is through 
Treasury " deposits," this being made possible only by 
permitting new forms of security to be used as collateral. 

4. That the National Bank Act is defective in that it 
permits all the banks outside of the central reserve cities 
to loan their legal reserves, and still count these loans as 



INTRODUCTION xxxni 

reserves for meeting obligations to pay depositors; in 
operation the reserve law only makes the banks inter- 
dependent, but also makes a large part of the money 
and credit of reserve institutions available for speculation 
only, thus encouraging " margin trading " during periods 
of low interest rates, unsettling the investment markets 
and endangering the whole credit system for the protec- 
tion of which the reserves are created. 



Neglected Aspects of the Currency and Banking Question 

While there is practical unanimity of opinion with 
respect to the need for elasticity and some of the condi- 
tions present which have produced inelasticity, experience, 
especially our recent experience, points to essential con- 
siderations that have been entirely overlooked or seldom 
referred to in discussion. The considerations referred to 
are suggested by the following questions: 

i. What amount of elasticity must be provided for? 

The question has a double bearing; it suggests 
inquiry, with respect to two aspects of the financial 
situation; (a) what is the variation in the business 
demand for money, and (b) what is the amount of 
elasticity in bank- credit required to meet legitimate 
business demands ? That no serious attempt has been 
made by legislators even to approximate a scientific 
conclusion appears from the bills now pending. The 
limits to be placed on issue powers of banks range 
from $250,000,000 to not less than $2,000,000,000. 



xxxiv INTRODUCTION 

2. What kind of protection is needed? 

A large number of bills have been brought forward 
at Washington to the end that the deposit obligations 
of banks may be insured. That this element of pro- 
tection is seriously contemplated is shown by the large 
proportion of all the banking bills containing such 
provisions and the broad representation and high 
standing of their authors. Among them may be 
named Senators Raynor, Culberson, Brown, Nelson, 
Curtis, Gore, Scott, and Owen, and Representative 
Fowler. Deposit insurance will doubtless be forced 
by state legislation, if not by the federal law. But as- 
suming that the deposit obligations of banks had been 
fully insured, would this have materially relieved busi- 
ness distress during the recent panic? Assuming the 
average time of bank-credit accommodation to be sixty 
days, the actuarial risk of loss amounts to about ^io" 
of one per cent. Do stability of business and sane judg- 
ment require legal protection against loss from insol- 
vency of banks, so much as legal protection against 
the violent and dangerous expansions and contractions 
of bank- credit? Are not the direct losses to depos- 
itors negligibly small as compared with the disasters 
which follow the efforts of banks to obtain money with 
which to protect themselves from insolvency, or from 
inability to maintain their own credit- accounts when 
demand is made by other banks for settlement of 
balances. 



INTRODUCTION xxxv 

3. What are the influences which bring about dangerous 

expansions in credit? 

From 1904 to 1906 the expansion in deposit obli- 
gations of commercial banks of the United States 
amounted to about $2,000,000,000. This was the 
amount by which this form of cash was increased with- 
in the two years immediately before the present stress 
for money became seriously felt. It is not suggested 
that any danger lies in the mere fact of expansion, but 
it is now a matter of experience that this particular ex- 
pansion was dangerous. It is also a matter of history 
that the havoc wrought by every panic that has oc- 
curred during the last half century has been the result 
of the contraction of a dangerous expansion of bank- 
credit. Looking toward a proper appreciation of 
the influences which bring about expansion the fol- 
lowing questions seem pertinent. In time of finan- 
cial ease, has it not been the constant effort of banks 
to increase their demand obligations to depositors 
without any regard whatever to their own capitaliza- 
tion? As a means to this end, and at the same time 
keeping within the money-reserve requirements, have 
not the national banks in reserve cities offered inter- 
est and every known inducement to other institutions 
for money loans which might be carried as reserves 
to support a credit expansion that ultimately became 
dangerous ? 

4. What are the incidents to credit contraction? 

Without adverting to the results of contraction of 



XXXVI 



INTRODUCTION 



credit so disastrously felt and heroically met by the 
business community, the recent panic suggests the 
following specific inquiry: Is the financial problem 
which confronts the community in time of panic pri- 
marily a currency question, or is it essentially one of 
the inability of banks to maintain a volume of credit 
which they had previously issued to merchants and 
manufacturers for use as cash in their current busi- 
ness? Is not the purpose of these issues of credit to 
increase the profits of the bank? Have not a large 
part of the reserves which have been held by banks 
to support these increased credit issues been borrowed 
from other banks, instead of being provided for by cap- 
italization ? Have not money stringencies been largely 
due to demands created by these banks for the pay- 
ment of reserve loans as a means of protecting their 
own customer's accounts? In these several relations 
the following statement of facts taken from the report 
of the comptroller is illuminating: 



Banks 


Individual 
Deposits 


Money 
Reserves 


Percentage 

of money 

reserves to 

deposit 


Money borrowed from 

other banks and the 

U. S. Treasury 


Savings Bank 

Loan and Trust Companies 
State Banks 


(millions) 

$3,495 
2,061 
3,068 

4,3*9 
IS* 


(millions) 

$ 28 

104 

254 

701 

8 


.008 
.050 
.083 
.162 
.058 


(millions) 
$ 8 
167 
211 


National Banks 


i,738 
2 






$i3,°95 


$1,097 


.084 


$2,128 



There are now two bills before Congress which make 
a clean breast of the reserve loan practice. Senator 



INTRODUCTION xxxvii 

Culberson (S. 3027) would have " every national bank 
. . . keep on hand in its own vaults the reserve of 
lawful money provided by law." Senator Heyburn 
(S. 3044) would require that when a bank shall permit 
its money reserve to fall below twenty per cent it " shall 
not increase its liabilities by making new loans other 
than by discounting or purchasing bills of exchange 
payable at sight," and would also during such period 
forbid the payment of dividends. These measures 
would seem to be weak at two important points, viz., 
(1) they do not provide for the investment of reserves 
and the use of these investments as security for govern- 
ment loans or issues; (2) they do not attempt to co- 
ordinate reserves with capitalization, i.e., under either 
measure the money-reserves may be borrowed money. 

5. What would be the effect of the capitalization of legal 
reserve requirements? 

To know what amount of capital would be required to 
provide for redemption equipment equal to the amount 
of the legal reserves required of banks (after taking 
out of the capital and surplus such unavailable assets as 
the cost of banking houses, real estate, and the margins 
on securities deposited as collateral for issues, govern- 
ment deposits, bonds borrowed and other secured 
loans, and also after providing for the necessary work- 
ing balances to provide for exchanges in other cities) 
would require a special inquiry on the part of the comp- 
troller of the currency. As nearly as may be approxi- 
mated without an official inquiry, such a provision of 



xxxviii INTRODUCTION 

law would add not far from $500,000,000 to the cap- 
ital of national banks, as a prerequisite to incurring 
their present deposit obligations, and, if applied to state 
institutions as well, would add not far from $1,000,000- 
000 to the total bank capital of the country. What- 
ever might be the amount, would not this added 
capital contribute materially to give increased stability 
to business and increased elasticity to bank-credit? 
Even though it add to the capital cost of bank- credit, 
would it not be an economy to the business world ? 
Presumably some such result was in the mind of 
Senator Owen when he introduced his bill (S. 3987) 
by which he would forbid a national bank from incur- 
ring deposit obligations in excess of ten times its capital 
and surplus. He would also limit speculative loans 
to the amount of a bank's capital and surplus (S. 
3986). In view, however, of the known facts, these 
measures would be of no practical effect. The ratio 
of capitalization to deposit obligations has been re- 
duced two-fifths since 1896. Should not immediate 
steps be taken to make the foundation of our credit 
safe, and provide for adequate expansion without en- 
dangering the public? 

6. Is it either safe or expedient to have a large volume of 
bank-notes permanently outstanding? 

For two decades the banking interests fought against 
the continued use of greenbacks. The result of the 
agitation was a compromise limiting the form of credit- 
money to $346,000,000. During the last few years the 



INTRODUCTION xxxix 

bank-note circulation permanently outstanding has been 
increased over $400,000,000. In this relation the ques- 
tion may be raised as to whether Gresham's law does 
not operate on permanent issues of bank-notes as well 
as on greenbacks. Have we not in recent legislation 
and practice, with respect to bank-notes, employed a 
form of money that is cheaper to the banks than 
greenbacks? Have we not in the volume of bank- 
notes permanently outstanding a monetary device more 
dangerous than greenbacks, for the reason that they 
not only drive gold and silver out of the country but 
at the same time encumber the banking capital by 
means of which gold and silver might be brought into 
the country when such a need is felt. In the legisla- 
tion now before Congress few measures have any re- 
gard for this situtation. The bills of Senators Knox 
(S. i239),Raynor(S. 2954),Aldrich (S. 3023), and Owen 
(S. 3988), follow the recommendation of the President, 
viz., that the bank-note currency should be taxed suffi- 
ciently to make it an emergency currency. Senator 
Knox would tax all issues secured by United States 
bonds five per cent, and all issues having other col- 
lateral security 7 per cent. This is subject to the 
criticism that such a tax imposed, without refunding 
the national debt, would at once operate to reduce 
the price of United States bonds, and therefore would 
amount to confiscation of the premium. Senator 
Aldrich has met this moral question by providing that 
the tax on issues against United States bonds remain 
practically as at present, but would impose a tax of 
6 per cent on all other issues. His measure, however, 



xl INTRODUCTION 

becomes practically ineffective in that it makes no 
provision for reducing the permanent bank-note circu- 
lation; in fact, by the terms of his bill, the permanent 
note circulation might be increased, and it specifically 
provides that all banks may thus encumber 50 per 
cent, of their capital and surplus. Senators Raynor 
and Owen would impose 6 per cent during the first 
four months of issue and 8 per cent thereafter, per- 
mitting any security to be accepted that may be ap- 
proved by the Secretary of the Treasury. 

7. Should government funds be used to give more than 
temporary relief? 

In this relation it is to be conceded that bank-notes 
are nothing more nor less than loans of government 
money to the banks without interest. The govern- 
ment loans unsigned notes to the bank for issue in 
exchange for a collaterally secured obligation of like 
amount to the government. Unquestionably govern- 
ment ''deposits" stand in the category of collateral 
loans without interest. Having this fact in mind, these 
questions are fairly presented : When business interests 
are endangered by reason of the inability of banks to 
maintain the volume of credit needed, should govern- 
ment loans be looked to to give more than temporary 
relief ? Do not loans by the government without in- 
terest, or at a low interest rate, cause the banks to rely 
on "deposits" instead of their own capital? Will not 
such a practice cause the banks to retain these loans 
when not needed, unless the government arbitrarily 



INTRODUCTION xli 

enforces payment against their wishes? Do not de- 
posits, without a rate of interest which will cause the 
banks to repay the loans as soon as an emergency 
is passed, leave the whole situation subject to the 
discretion of public officials, instead of making regula- 
tion automatic? Does not a large volume of govern- 
ment deposits or loans without interest to the banks, 
weaken instead of strengthen the credit situation, and 
leave the banks without the possibility of obtaining 
collateral aid when a new emergency arises? 

8. Is a "great central bank' 11 a better institution to give 
collateral support to our banks than the Treasury? 

The large bank idea has taken two distinct forms, 
one as expressed in Senator Hansbrough's bill (S. 547) 
giving to an institution controlled by other banks the 
widest banking powers, both of loan and deposit; and 
the other as expressed in Congressman Fornes' bill 
(H. R. 13845) giving to a government controlled insti- 
tution, with capital of $100,000,000, powers of issue 
only — all issues over $100,000,000 to be taxed on a 
graduated scale of from 6 per cent to 10 per cent per an- 
num, thus making the issues in excess of capital an 
emergency circulation. Assuming that a large perma- 
nent issue of bank notes is not a good business expedi- 
ent, and narrowing this part of the problem down to 
a choice between a great bank and the United States 
Treasury, in case the funds of the United States Treas- 
ury were not permanently loaned to banks may not 
the United States Treasury do all that it would be safe 



xlii INTRODUCTION 

for a great central bank to do? In case the funds of 
the government were loaned or deposited with a cen- 
tral bank would they not operate on the financial 
system in the same manner as if loaned to other banks ? 
Having in mind the arguments of prominent bankers, 
the further question may be asked: Does the cumula- 
tion of a treasury surplus operate to deprive the busi- 
ness of the country of the use of money held by the 
government, or is this surplus drawn from the money 
stock of the world, thus increasing the money stock of 
the United States? If the conclusion is reached that 
it does operate to increase the money stock of the 
United States, with adequate money-reserves main- 
tained by the banks may not a treasury surplus be 
held with advantage as an emergency fund for any 
use to which it might be applied, thus placing the 
United States in a stronger position financially than 
any other nation, — a situation which might go far 
to relieve this country from the incidents of falling 
markets and failing credit abroad? Would not legis- 
lation which would permanently encumber or tend to 
encumber the government surplus or lower the capital 
strength of the banks, operate to make this country 
still more dependent on foreign states, and to relin- 
quish a financial advantage which by nature and trade 
position it enjoys? 



INTRODUCTION xliii 

Evolution not Revolution Needed to Make Business 
Credit Secure 

In recent discussion of currency and banking, it has 
seemed that a too narrow view has been taken: By one 
class the assumption is made that " issues" of Government 
are capable of affording the " elasticity" desired; another 
has attempted to demonstrate that in an "assets-bank- 
currency" is to be found the nostrum for financial ills. 
Both classes have failed to recognize the fact that fully 
ninety-five per cent of the "cash" used in business 
other than banking is made up of bank accounts. Both 
have failed to see that the great credit structure by means 
of which business is transacted rests on two distinct and 
widely separated pillars — the Independent Treasury, 
and the Commercial Bank; that each has its own burden 
and responsibilities; that the one is an institution of pub- 
lic-money-issue, the other an institution of private- credit; 
that the one supports a large issue of credit-money upon 
a "gold reserve" for its foundation, the other a still larger 
issue of bank-credit upon a "lawful money-reserve." 
Upon these two pillars is rested a superstructure of private- 
credit incalculable in amount — a magnificent pile, to the 
building of which nearly every business transaction of the 
immediate past has contributed and which in its long- 
time credit-obligations projects itself into the future, in- 
volving to a greater or less extent the prospective business 
of the next fifty years. It is this towering superstructure 
of credit, sensitive to the last degree, and the contempla- 
tion of the perils of a shock to so delicate and compre- 
hensive an organization, that makes a matter of currency 



xliv INTRODUCTION 

or banking reform a dangerous undertaking — one that 
should be carefully considered and not entered upon 
lightly from motives of political expediency. 

During the last two decades currency and banking 
questions have been prominent in the councils of the 
nation, and many radical changes have been proposed. 
Every sudden institutional or social change must of 
necessity be accompanied by disturbances due to break- 
ing bonds of custom and to the introduction of certain 
elements of the unknown as premises for judgments con- 
cerning the future. This fact, together with the known 
sensitiveness of the credit structure, suggests that what- 
ever the financial reforms to be undertaken, we break 
with the present no further than is necessary to accommo- 
date immediate needs. Sweeping changes would amount 
to financial revolution, and proposals of this kind should 
be peremptorily dismissed. 

The suggestion that we should at once abolish one of 
the pillars upon which the national-credit superstructure 
rests (the United States Sub-Treasury) brings with it 
nothing but a picture of national distress. No change 
of this kind could safely be undertaken till the present 
burden of credit-money had been removed from the 
capital; there must first have been a complete revision of 
the monetary system — a system that we have labored a 
century to bring to its present state of "soundness" and 
which in its architectural plan is yet scarcely completed. 
The proposition to throw the whole financial burden on 
the commercial bank, and to strengthen this by a scheme 
of centralization, carries with it the same certainty of 
disaster, unless the change be gradual, and unless also 



INTRODUCTION xlv 

every shift of stress be made after a careful calculation of 
probable results. 

And this calculation should be something more than 
philosophical conjecture. It should be based on ex- 
perience. In the preparation of this work it has been 
the constant endeavor to measure carefully every salient 
point of the present financial structure, to take into account 
the monetary and banking experience of the past, and, 
having in view this experience, to suggest certain results 
that may be attained in the direction of increased sound- 
ness and elasticity by slight changes in the organic rela- 
tions of the system with which we are now working and 
which in all its details we may understand. Making these 
suggestions it has been the underlying belief that experi- 
ence is the only safe guide to judgment — that evolution 
and not revolution should be the principle of financial 
reform. 

New York, 

January 15, 1908. 



CONTENTS 

CHAPTER PAGE 

I. Commercial Banking and Speculation . . i 

II. The Use of Commercial Bank-Credit in 

Lieu of Industrial Capitalization . . 13 

III. The American System of Currency and 

Banking 29 

IV. Credit-Money and the National Bank . 41 

V. The Demand for a " Sound " and " Elastic " 

System of Bank-Credit 54 

VI. The Relation of Bank Capitalization to 

the Problem of Elasticity 67 -t/ 

VII. The Public Control of Commercial Banks 77 

VIII. An Element of Control not Adequately 

Provided by the National Bank Act . 99 

IX. Character of Assets that May Be Safely 

Held by Banks as "Invested-Reserves" 113 

X. Public Dangers in the Present Equipment 

of National Banks 127 

xlvii 



xlviii CONTENTS 

CHAPTER PAGE 

XI. Why the "Unencumbered Securities" of 
National Banks are not Readily Con- 
vertible into Cash 146 

XII. False Assumptions made by the Govern- 
ment with Respect to Currency and 
Banking 157 

XIII. Advantages of National Banks over State 

and Private Banks under the Present 
Practice 171 

XIV. The Amount of Money and Credit for 

which Elasticity should be Provided . 180 

XV. Possibilities of Elasticity under Our 

Present National Banking System . . 193 

XVI. Possibilities of Increasing Elasticity by 

Simple Modifications of the Present Law 208 

XVII. Superior Possibilities of the American 
Financial System for Adapting Current 
Funds to Current Needs . . . '. . 237 

XVIII. Recent Efforts to Adapt Our Currency and 
Banking System to the Nation's Business 
Needs 259 

Appendix of Documents: 

"The Baltimore Plan" of Currency Reform, 1896 . 291 

"The Carlisle Plan," 1896 293 

Fowler Bill of March 15, 1897 296 

Indianapolis Monetary Commission Bill, January 6, 

1898 303 



CONTENTS xlix 

Appendix — Continued: page 

McCleary Bill, May n, 1898 306 

Aldrich Bill, December 19, 1899 311 

Secretary Gage's Bill 312 

Gold Standard Act, March 14, 1900 316 

Fowler Bill, April 4, 1902 319 

Payne Bill, February 26, 1903 323 

Fowler Bill, February 26, 1903 325 

Culberson Bill, January 7, 1908 (S. 3027) . . . 327 

Heyburn Bill, January 7, 1908 327 

Rayner Bill, December 21, 1907 329 

Brown Bill, January 7, 1908 331 

Culberson Bill, January 7, 1908 (S. 3028) . . . 332 

Gore Bill, January 13, 1908 335 

Scott Bill, January 14, 1908 335 

Curtis Bill, January 14, 1908 337 

Knox Bill, December 5, 1907 338 

Aldrich Bill, January 7, 1908 342 

Culberson Bill, January 7, 1908 (S. 3026) . . .348 

Bulkeley Bill, January 9, 1908 350 

Clay Bill, January 9, 1908 . . . . -. . 352 

Owen Bill, January 15, 1908 - ' - 353 

Piatt Bill, December 4, 1907 355 

Hansbrough Bill, December 4, 1907 364 

Fornes Bill, January 15, 1908 368 

List of Charts: f ^™ g 

I. Showing fluctuations in credit compared with 

capitalization 4 

n. Showing commercial assets compared with 

capitalization 8 

m. Showing periods of increased and decreased 

business activity 18 



1 CONTENTS 

List of Charts — Continued: facing 

PAGE 

iv. Showing correspondence of credit fluctuations 

with business activity 24 

v. Showing fluctuations in money-demand ... 60 
vi. Showing effect of national money-demand in 

New York 70 

vn. Showing how money-demands reach New York 

through the reserve system 134 

viii. Showing amount of money borrowed by New 

York banks for use as reserves 152 

IX. Showing how bank-credit is affected by specu- 
lation 160 

x. Showing how fluctuating demands are met in 

Cotton States 176 

XI. Showing varying conditions of credit in different 

sections of the country 184 

xii. Credit conditions in Corn States compared with 

Cotton States 202 

xm. Showing money-reserve, securities held, credit 
accounts and commercial assets of National 
Banks 244 

Tabular Inserts: 

1. Consolidated Statement of Capital Accounts of 

all National Banks in the State of Iowa . . 94 
n. Classified and consolidated balance sheet of all 

National Banks in the United States . . . 130 



THE BANK AND THE TREASURY 

Chapter I 

COMMERCIAL BANKING AND SPECULATION 

December, 1890, the announced embarrassment 
of Baring Brothers called the credit institutions of 
Europe to a halt. A period of promotion and specu- 
lation in new industrials, in railways, 
Periods of credit j . ,, ... r ,, A 

fluctuation and m the f ecunties of South Amer- 

ica, Australia, and South Africa was 
suddenly ended. The movement preceding the 
failure had been one of expansion — a struggle for 
increasing profits; the movement following the fail- 
ure was marked by credit retraction and trade 
depression — by efforts to recoup and prevent fur- 
ther loss. Although for two years after 1890 we had 
tremendous forces working in our favor (with un- 
precedented yields of grain and higher prices of food 
stuffs, due to crop failure abroad), the detracting in- 
fluences of foreign depression and foreign financial 
reorganization brought home to the United States the 
fact of over- speculation ; in 1893 our credit institu- 
tions collapsed and we followed the wake of Europe 
through a period of depression. Our experiences of 
1893, following 1890, was similar to our financial 

[i] 



2 THE BANK AND THE TREASURY 

collapse in 1884, following foreign failures in 1881. 
September, 1902, brought us again to face the pos- 
sibility of another credit reaction. 

About two years before, another period of specu- 
lation abroad had come to an abrupt end; since 
that time Germany and England had been passing 
through financial readjustment and reorganization. 
Here in the United States, as in the two years fol- 
lowing 1890, we had forces at work to keep the wheels 
of industry moving at an increasing 

actions W€ ™ ra * e ' ano " trade journals looked upon 
this growing activity as evidence of 
national thrift — an era of unprecedented prosperity 
based on safe business methods. Those represent- 
ing manufacture, merchandising, and transportation 
enterprise saw ahead nothing but increasing activity. 
But the experience of the last four months of 1902 
caused men in financial circles to regard the situation 
with feelings of apprehension. Months of strain on 
our commercial credit institutions, months of adverse 
trade balances, months of increased speculation had 
put those in control of financial interests on their 

guard. 

Causes 0} Credit Fluctuations 

After September, 1902, the financial situation was 
the general topic of discussion among bankers, and 
these deliberations found strong expression in ap- 
peals to the National Government for measures of 
relief. Among those who early sounded notes of 



BANKING AND SPECULATION 3 

warning was the vice-president of the National City 
Bank of New York. Commenting on the financial 
outlook in November, 1902, Mr. 
%Psl CredU Vanderlip showed that from 1896 to 
1902 the increase in business activity 
of every kind had been accompanied by a like increase 
in the credit-accounts (so-called deposits) sold by 
banks to their customers; and that along with so- 
called prosperity had been purchases of commercial 
paper by the banks by means of these increased 
book-credits or "deposits." He called attention to 
the dangers of expansion in the credit-accounts (de- 
posits) of the National banks. He pointed to the 
even greater extension of credit by State banks 
and trust companies. From the most reliable 
data available the increase in demand obligations 
to depositors was placed at $3,600,000,000; within 
six years there had been an increase of credit-funds 
in the form of bank accounts, amounting to almost 
double the entire money stock of the country both 
in circulation and in the Treasury. 

What had been the increase in banking equip- 
ment ? What provision had been made by the banks 
for maintaining these increased burdens on the 
credit structure? After showing that during the 
three years following 1899 the credit accommoda- 
tions of National banks alone had increased $1,300- 
000,000, Mr. Vanderlip further commented as 
follows: "With that increase in liabilities of Na- 



4 THE BANK AND THE TREASURY 

tional banks in mind, let us look at the assets 
representing the reserve basis. The 

2TS5S& t0tal ° f Spede and le g^nders held 

"by National banks last month [Octo- 
ber, 1902] was $508,000,000. The total at the begin- 
ning of 1899 was $509,000,000. Here we have an 
expansion of $1,300,000,000 in deposits [demand 
obligations of the banks used in the community as 
funds], while the basis of gold and legal-tenders 
upon which that inverted pyramid stands is actually 
slightly smaller than it was at the beginning of the 
period. Now, in that same time, the deposits of 
the other banks — State banks, trust companies, 
savings banks, and private banks — have probably 
increased not far from three billion dollars, and 
there is little likelihood that their gold and legal- 
tender reserve is materially larger than — if it is as 
large as — at the beginning of 1899. We have had, 
then, in less than four years, an increase in the bank 
deposits [bank credit-accounts] of the country of 
over four billion dollars accompanied by no increase 
in the specie or legal-tender holdings of these banks. " 

Causes of Credit Contraction 

The data relied on for this conclusion were taken 
from the report of the Comptroller, an official 
compilation made from the returns of the banks 
themselves. The evidence presented in the report 
of the Comptroller, however, went further; it showed 



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BANKING AND SPECULATION 5 

that, during the period under discussion by Mr. 
Vanderlip, the capital of these institutions had not 
been proportionately increased. We may take a 
still longer period: May, 4, 1893 (before the de- 
pression began), the capital, surplus, and undivided 

profits of National banks amounted 
support Caph t0 $1,041,807,066.87; September 15, 

1902, immediately before the Octo- 
ber money and credit stringency of that year began 
to be felt, the total of capital, surplus, and undivided 
profits was only $1,201,145,882.69, a decrease of 
nearly $11,000 per bank doing business. There had 
been an increase of $1,561,335,896.44 in obligations 
to depositors, while the gross increase in capitaliza- 
tion available to support this increase in demand 
liabilities was only $159,338,815.82, about ten per 
cent. The average net increase in deposit liabilities 
was $282,418 ; the net decrease of capital was $10,951 
per bank doing business. 

The banking equipment of 1893 had proved too 
weak to support outstanding credit obligations. In 
September, 1902, the current credit-accounts out- 
standing were vastly larger than in 1893. Without, 
therefore, materially increasing the capital employed 

in the business, in fact actually de- 

CoyifbOLTISOfl of 

iSq/and 1002 creasing the average capital per bank 

doing business, the banks had been 

offering to the public, and actually selling, an increase 

in accounts-payable over those outstanding in 1893 



6 THE BANK AND THE TREASURY 

amounting to $1,567,000,000; in 1902 they had 
sold an amount of demand-credit for use in the busi- 
ness community as funds equal to about double the 
amount of deposit liabilities outstanding in 1893. 
The experience of 1902 was a repetition of the ex- 
perience of 1893, and this in turn was a repetition of 
1884 and 1873. In each of the previous cases disas- 
ter had followed close on the heels of an inflation of 
credit-accounts. 

Methods Employed for Expanding Commercial 

Credit 

But in his address of warning Mr. Vanderlip did 
not stop with showing the weakness of the reserve 
basis. He proceeded to a second conclusion: 
"What/' he asks, "has brought about this remark- 
able development of bank-credit ?" The answer 
must at once come to the mind of any observer of 
finance that the principal reason for the expansion 

of deposits (bank credit-accounts) 
The flotation of , , , . r 

new companies and the accompanying expansion of 

loans (commercial paper held by 
banks) is to be found in the great movement which 
has been the significant feature in financial affairs of 
the last half dozen years — the movement to aggre- 
gate industrial establishments into single great cor- 
porate units and to convert the evidence of ownership 
into corporate securities which have entered actively 
into the stream of financial operations. Vast amounts 



BANKING AND SPECULATION 7 

of new securities have been created in these half- 
dozen years, based in a large measure upon proper- 
ties which were before held as fixed investments by 
individuals, or, if standing in the form of corporate 
property, the securities of these corporations were 
more closely held, and in but small measure entered 
into the financial operations of the day. This move- 
Theuseojnew ment — tending to convert the evi- 
issues as col- dences of ownership of a great amount 
of fixed property into a form which 
has been considered a bank collateral, and which has 
been made the basis of loans and of corresponding 
increases or deposits — is undoubtedly the most im- 
portant single cause for the increase of more than 
four billion dollars in bank deposits [bank accounts] 
and bank loans [commercial paper] of the country 
in the space of three or four years. 

A False Notion of "National Prosperity" 

We would not shut our eyes to industrial progress 
— to the fact of augmented capital and increasing 
production. We would not deny the benefit of 
thrift, nor the prosperity which comes from mating 
industry with economy. But such are not the phe- 
nomena which have stirred national pride, carried 
The imaginative & beyond the rule of reason, and un- 
quality in bust- settled the judgment of our industrial 
leaders. Periodically we become psy- 
chologically drunk. That which has inebriated has 



8 THE BANK AND THE TREASURY 

not been the wine at the feast, but a distorted imagi- 
nation that lives in dream-pictures of opulence. Not 
the actual increase in wealth, but an increase in the 
estimates of value given to our possessions swells us 
with a vanity of hope which marks us for destruction. 

The basis for criticism for every "note of caution" 
addressed to the public during such a crucial period 
is found in the exuberant feeling then current, ex- 
pressed in the oft-repeated phrase "national pros- 
perity." If we accept the reasoning of Mr. Vander- 
lip and others, the ancestral lineage of this wonderful 
prosperity is not hard to trace. At- 
1803-1806^ ' tention may be called to the fact that 
the depression from 1893 to 1896 was, 
as were other similar periods, one of financial reor- 
ganization — one of new economies introduced into 
our industrial establishment. During this period of 
depression the water had been gradually squeezed 
out of previously inflated capitalizations; again the 
nation had come to rely, for its "cash" as well as for 
its income, on profits from legitimate business. With 
such an equipment we were able to sell pig iron at a 
profit of $10 to $12 per ton; steel rails were sold with 
a liberal return to capital at $17.50 per ton; and bar 
iron entered a profitable market at 95 cents per 
hundred. 

After business had been reorganized on a lower 
base of capital liabilities, thousands of commodities 
were produced with profit at prices such that they 



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BANKING AND SPECULATION 9 

began to find their way into foreign marts and, in 
competition with foreign made goods, undersold 
them. Europe was startled at our commercial 
strength developed. Our appearance with shiploads 
of products that others could not 

Tll€ UllSXttCSS TC~ f • 

vival of 1807 manufacture at competitive rates 
made the world realize that in the 
Western continent were resources and an industrial 
development that in free competition might bid de- 
fiance to all Europe. Under such circumstances bills 
of exchange drawn against the sale of these goods 
formed a true basis for commercial bank loans, and 
bank-credits were supported by capital-resources ade- 
quate to protect them — a banking equipment that 
included a thirty-three per cent money-reserve for 
the redemption of demand obligations. And as our 
foreign trade increased, instead of allowing this 
banking equipment to become impaired, we at that 
time imported gold for new banking reserves, to 
support new credits, and new current funds were 
again at hand for the support of still larger commer- 
cial accommodations in the purchase of bills and 
commercial paper based on actual sales of produce. 
What was the result, however, when the commer- 
cial bank extended its support to the capitalization of 
new promotions and became the chief factor in the 
" industrial speculation" that grew out of this sudden 
national awakening? Instead of limiting the com- 
mercial banking business to the service of a com- 



10 THE BANK AND THE TREASURY 

mercial constituency, instead of devoting the energies 
and the funds of commercial banks to the accommo- 
So-called pros- dation of producers and merchants, 
perity and specu- a system of underwriting new flota- 
lative excesses ^^ wag inaugurated . This was 

not a novel experience. Similar practice is recalled 
by the ex-Assistant Secretary of the Treasury, by 
reference to the "real-estate" restriction in the Na- 
tional Bank Act. Back of the law forbidding banks 
to loan on real-estate securities may be seen the long 
periods of industrial depression and financial reor- 
ganization following the panics of 1825, 1837, and 1847. 
Each period of prosperity immediately preceding 
these crises had been one of capitalization of new 
promotions. At that time, however, speculation was 
based on the possibilities of increasing profits to be 
derived from the development of agricultural re- 
sources. Westward migration had appropriated for 
use large areas — a new empire — of grain lands for 

which new transportation develop- 
False attitude of -, ■, -. , , , , , 

the banks ment had opened a market to the 

seaboard. New cotton, tobacco, and 

hemp lands enlarged this area to such an extent that 

the territory appropriated but still undeveloped was 

larger than the old Atlantic slope to which capital 

had before confined its investments. In these new 

areas all other demands gave way to the clamor for 

new capital, and the commercial banks attempted 

to supply this demand. 



BANKING AND SPECULATION 11 

The failure of some eight or nine hundred com- 
mercial banking institutions during 1837 and 1838 
was the result of this kind of bank-credit employ- 
ment; the failure of nearly fifteen hundred banks 
during the next three decades of State banking on 
investment securities brought to " the mind of prac- 
tical bankers the character and purpose of the com- 
mercial bank. In 1903 and 1904, while Europe 
was going through the throes of financial reorgan- 
ization, our farmers were blessed with large crops 
and high prices; a kind and bountiful Providence 
Need for re- filled the granaries and the storehouses 
medial legisla- of the great West and South, per- 
mitting us to levy tribute on a dis- 
tressed world. Temporarily judgment on our 
financial folly was suspended, but the instruments 
of self-destruction were still in the hands of an un- 
thinking speculative public. These instruments of 
destruction were placed in the hands of speculators 
by commercial banks in the great financial centres. 
They were used not alone in self-destruction, but 
merchant and manufacturer have suffered such 
violence that we are now threatened with a general 
depression from closed shops and unsold merchant 
stocks. 

Organized and capitalized for the purpose of 
rendering service to a business community in fur- 
nishing " current funds," or "cash" for current 
use, the equipment of the commercial bank is nee- 



12 THE BANK AND THE TREASURY 

essarily ill-adapted to the work of " permanent 
capitalization." To employ the funds of a com- 
mercial bank for long-time real-estate investment 
has ever been found unsafe, and following 1837 
legislation was invoked to protect the public against 
loss. The same need for restrictive and protective 
legislation is now upon us. And such legislation 
should be as welcome to the conservative banker as 
to the community. The public requires protection 
against ruinous disturbances to commercial credit; 
the conservative banker would be protected against 
the competition of short-sighted officers and specu- 
lative managers of financial institutions who, posing 
as bankers, are responsible for these disturbances. 



Chapter II 

THE USE OF COMMERCIAL BANK-CREDIT IN LIEU OF 
INDUSTRIAL CAPITALIZATION 

In business, there are two distinct classes of obli- 
gations for the future payment of money which are 
made subjects of investment. These two classes are 
commonly known as (i) " capital liabilities," and (2) 
current credit liabilities, or " floating debt." The cap- 
ital liabilities are those obligations (shares or bonds) 
incurred by a concern which are sold to obtain funds 
or properties for permanent equipment or for con- 
tinuous use in the business. The current credit 
liabilities are those obligations which are sold to 
obtain funds for some temporary or current need. 

These differing purposes give char- 
Methods of capi- . , ■. r . 

talization acter to the two classes of contracts 

as investments. The need for capital 
being a continuing one, the contracts representing 
capital liabilities are long-time contracts. Share 
contracts are interminable and consequently are 
not due or payable during the life of the concern ex- 
cept by proprietary resolution reducing the amount 
of capital employed. Even the current income pay- 
ment on share contracts are made contingent on 

[13] 



14 THE BANK AND THE TREASURY 

profits and the declaration of dividends; there is no 
obligation for payment of money which will in any 
way embarrass the concern or threaten its capital. 
The " credit" capital liabilities are those contracts 
for the future delivery of money, such as bonds and 
mortgages, the principal of which is made payable 
after such a time that the company may make ample 
provision by payment out of profits or by occasional 
refunding. A company which has not been ade- 
quately capitalized may, however, procure equip- 
ment and properties for continuous use with funds 
obtained by temporary loans or on floating debt. 
This bespeaks a condition of under capitalization, 
is unusual, and is dangerous to the last degree. 

The capitalization of a business by means of long- 
time obligations should be large enough to cover all 
of the continuous financial needs. That is, the cap- 
ital thus contributed must be large enough to provide 
the properties and equipment permanently or con- 
tinuously used. To provide, by the sale of long-time 
obligations, more funds than are needed to carry the 
stock and to obtain the property and equipment 
continuously needed, would be to encumber the busi- 
ness with an unnecessary capital burden. To pro- 
vide, by sale of long-time contracts, 
Capital require- £ j 1 • ,i ,i 

me y lts funds less in amount than the per- 

manent or continuous needs, would 
be to handicap the management by putting it under 
the necessity of constantly refunding capital needs 



BANK-CREDIT IN LIEU OF CAPITALIZATION 15 

and to prejudice success by carrying a floating debt, 
at an increased current cost, for the payment of 
which there are no assets available other than those 
which, if taken for liquidation, would impair the 
equipment in use. 

The distinction between capital liabilities and cur- 
rent liabilities for the present purpose is this, that the 
former should be, and usually are, the subject of 
direct capital investment, while the second usually 
are the subject of commercial bank-credit invest- 
ment. The commercial bank is not organized for 
Capitalization of direct capital investment. It is cap- 
permanent finan- italized for the purpose of supporting 
its own credit obligations; and these 
credit obligations in turn are used as a means of 
purchasing the current liabilities of other business 
concerns. This is the business of banking. One wish- 
ing capital-funds ordinarily must apply to some one 
having funds for long-time investment. Capitaliza- 
tion depends on the long-time investment powers of 
a community. The permanent equipment of com- 
merce and industry can safely increase only so fast 
as investment capital increases. Investment capital 
is increased by importation as a result of foreign 
investment, or by net income in the form of returns 
on prior investments. The demand-credits (or de- 
posits) of banks are neither of these, and therefore 
are not proper funds for use in purchasing permanent 
equipment. 



16 THE BANK AND THE TREASURY 

In the recent period of inflation, as in other periods 
of speculation, it was not found necessary to await 
the tardy development of capital-funds for purchases 
of this kind; promoters did not find it necessary to 
appeal to such an investing constituency. They 
Funding perma- found that by incorporating industrial 
nent needs by means enterprises and consolidating corpo- 
0} an -ere i rate contro i ^ n j- s ^\\ larger corporate 

syndicates, these new securities or " industrials' ' so 
created could be listed on the market and could be 
made the subject of general quotation. This step 
taken, the speculation induced by the sudden realiza- 
tion of our commercial greatness as a world power 
was converted into an agency for marketing the new 
securities to banks. An active buying having been 
"stimulated," it was not necessary to wait for the 
investing public to absorb the flotation ; the margin 
speculator was utilized to obtain capital-funds from 
our commercial credit institutions, using the securi- 
ties so created as " collaterals." One syndicated 
issue having been introduced into the speculative 
pool and floated on margins (the promoters having 
realized) a new consolidation was undertaken and 
in like manner funds were again procured from the 
commercial banks. The infection spread from in- 
dustrials to railroads, to mines, and to every form of 
undertaking. 

It was on this character of banking resources — 
loans, secured by newly created collaterals — that 



BANK-CREDIT IN LIEU OF CAPITALIZATION 17 

a large part of the increase in our credit-funds (the 
deposits of commercial banks) was based. It is to 
credit obligations of this kind — those used by banks 
as a means of purchasing collateral notes of brokers 
and promoters secured by new flotations — that 
many of the disturbances to commercial credit are 
The character of attributable. Investments of bank- 
bank-credit so credit are not capital investments. 
So to use them is, by sudden credit 
expansion and then by a subsequent credit con- 
traction, to threaten industry with loss of equipment, 
or, by inability to contract, to threaten the bank with 
insolvency. Before such insolvency will be admitted, 
however, the increased credit burden will be shifted 
on the commercial constituency of the bank. The 
bank — the provider of current funds for current 
use — is forced to sacrifice the ends of its creation ; 
being allured into this kind of investment by a pros- 
pect of large gains from speculation, it is converted 
into an instrument of business uncertainty and of 
wholesale financial debauchery. 

Expansion of Bank-Credit and False Estimates o) 
Future Earning Power 

That a temporary increase in industrial activity 
results from these practices cannot be denied. Such 
has ever been the result of speculative promotions 
and credit inflations. The cause of this increased 
activity, however, is quite apparent. In each so- 



18 THE BANK AND THE TREASURY 

called " period of prosperity" the immense amount 

of new funds made available for the 
Credit inflation , r , . , 

and rising prices Purchase of properties and equipment 

through the flotation of securities and 
the expansion of bank-credit has increased the de- 
mand for every kind of material — of construction, 
of maintenance, and of subsistence. From 1898 to 
1903 manufacturers of pig iron could not fill do- 
mestic orders, and prices advanced from "$12 per 
ton in October, 1898, to $25 at the beginning of 1900; 
steel rails doubled in the same period, the price going 
from $17.50 to $35; bar iron scored even a greater 
percentage of gain within a shorter time, the price 
advancing from 95 cents a hundred in July, 1897, to 
$2.60 in October, 1899. The quotations of clear pine 
boards advanced from $45 to $73 a thousand; for 
brick, from $4.50 to $6 ; rope, from 5 J cents to 13 cents, 
and salt, from 21 cents to $1." Prices were advanced 
all along the line, in cases doubled and quadrupled. 
An increase from four to six billions in the credit- 
funds within five years — billions, not millions — 
made available to the country as a means of pur- 
chasing new materials and new services, by a simple 
process of " flotation," operated to put the conduct 

of enterprise into the hands of pro- 
False estimates of ■, -, 1 j ,.,,, ,, ' «. 

valuation moters who have had llttle thought 

for the future. Of what interest was 
it to the promoter that he was offering prices for 
materials twice or three times their cost when the funds 



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BANK-CREDIT IN LIEU OF CAPITALIZATION 19 

with which to pay for them were so easily obtained ? 
Why should he be concerned with cost of production 
when his profits were to come from promotion and 
equipment instead of coming from operations or 
permanent income on investment ? Of what interest 
is it to merchants and manufacturers that prices are 
higher when they might sell at advances which would 
yield increased net profits? These new trade de- 
mands and the consequent higher prices of products, 
based on credit-funds obtained from speculative flo- 
tations, temporarily increased the profits of produc- 
tive enterprise, and these new margins of profit 
carried speculation in capital shares to a still higher 
mark; again new market quotations made a new 
basis for estimates of value of the securities offered 
as collaterals; these in turn increased the amount of 
bank-credit made available for higher spendthrift 
prices; and again there came larger returns in the 
form of immediate net earnings to plants set in 
motion at a higher speed with larger equipment for 
supplying customers' demands. As has been re- 
peatedly demonstrated, this is not prosperity, but 
the result of a debauched popular judgment recording 
new increments of wealth by a process of increasing 
valuation of goods. 

No other explanation is needed for the reverse of 
the foreign trade balance. When American prices are 
high, instead of having a trade balance to be settled 
in Europe, exportation becomes so far reduced and 



£0 THE BANK AND THE TREASURY 

importation so far increased that for months at a 
time we are forced to borrow from abroad on " finance 
bills" — or other devices — some form of floating 
debt incurred by our bankers as a means of meeting 
the demands of a commercial con- 
joreign trade stituency. After 1898, instead of im- 
porting gold, " there has, in spite of 
the theoretical trade balance, been no significant 
shipment of gold in our direction," except when 
forced by temporary loans. More than this, our 
financial institutions have not had the strength to 
keep gold on this side. Before the end of 1902 we 
had begun to lose our gold. At that time conserva- 
tive bankers pertinently asked: "What of the fu- 
ture?" "If a hundred million dollars' importation 
of gold can serve as a basis for an expansion of so 
many millions of dollars of deposits and loans, what 
will an exportation of $100,000,000 mean?" It 
might have been added, that in all probability the 
adverse balances against our financial centres would 
have resulted in a complete overthrow of our inflated 
credit system had not the United States Treasury 
come to the relief of commercial banking institutions 
with deposits (loans of the Government to the banks) 
amounting to over $100,000,000; and within four 
months Government aid to the banks was increased 
to more than $160,000,000. 



BANK-CREDIT IN LIEU OF CAPITALIZATION 21 

Banking Crises Due to Credit Inflation 

But even with the support given by the Treasury, 

as events subsequently proved, the credit problem 

was not solved. The question of the ability of the 

commercial banks of the country to 
The crisis of ,, • ... .,, 

2 serve their constituency with current 

funds (the problem of adjusting the 
speculative situation and forcing liquidation of spec- 
ulative loans to such an extent as not to compel them 
to restrict accommodations to commercial enter- 
prise) kept the New York banker in a quandary by 
day and, for two years, hung over him like a spectre 
by night. 

With all effort bent toward the common cause; 
with united action on the part of the commercial 
banking fraternity acting on the best counsel and 
combining their united resources with those fur- 
The cooperation wished to the banks by the Treasury, 
of banks for pro- they managed to maintain their finan- 
cial integrity, although this was ac- 
companied by a long line of forced liquidations. To 
a large extent the "capitalization" of these new pro- 
motions fell on the banks and trust companies and 
weakened their equipment for the support of com- 
mercial credit accommodations. 

During the first weeks of January, 1903, with the 
customary New Year's commercial settlements and 
payments, there was a relaxation of nervous tension 



22 THE BANK AND THE TREASURY 

induced by what had come to be speculative neces- 
sity. But the far-seeing read the handwriting on the 
wall. Summer demands must be provided for; the 

"finance bills ' ' were coming due and 
Forced liquida- ,, ., , . , . , 

tion * these contributed to an adverse inter- 

national balance which set up expor- 
tation of gold; the character of securities held by 
American banking houses was not attractive to for- 
eign investors and sales of these could not be utilized 
as a set-off against foreign balances; moreover, spec- 
ulative syndicates found it necessary to "buy in" 
securities offered on the other side below the market 
here. 

It is much to the credit of our leading banking 
institutions that in 1902 a campaign of liquidation 
was inaugurated in time to allow them gradually to 
"convert" speculative loans, in anticipation of de- 
mands — to make available those forms of holdings 
Circumstances which in time of financial strain are 
favoring the absolutely unavailable, but which may 
s be realized on without loss to the 

banks if pressure is brought on the borrower in such 
moderation as not to induce panic. By making this 
pressure a gradual one, all the resources of the spec- 
ulative public in the market were utilized. 

But the effect was deadly. First the margins and 
accounts of the small speculators were wiped out; 
then the more resourceful "outsider" was driven to 
the limit of his means and was forced to suspend 



BANK-CREDIT IN LIEU OF CAPITALIZATION 23 

operations; later the contest was carried on between 
"insiders" and "professionals," the stronger utiliz- 
ing profits gained from those less able to manipulate 
the market; but in the end all contributed (through 

demands to maintain margins on a 
Hon a ^ nn g market by sale of stock and by 

reduction of loans) to keep up the 
reserves of the banks and protect the credit of New 
York institutions against exportation demands and 
against "calls" on reserve loans from the interior. 
For two years this liquidation continued. Those 
banks which had confined their operations to a com- 
mercial banking business were able to protect them- 
selves and their customers against serious losses. By 
fortuitous circumstances, by aid of the Government, 
and by cooperative action, through their ability to 
utilize the profits and resources massed by specula- 
tors during the five years preceding, those into whose 
fostering care the national funding system has been 
given were not driven to measures which seriously 
interfered with commerce. The dangerous expan- 
sion of 1905 and 1906 with the violent contraction 
of 1907 proved beyond a doubt that these resources 
are incidental, and speculative profits are not lim- 
itless. In 1904 as well as in 1907 it was the boun- 
teous return of a wide expanse of fertile soil and a 
partial failure of supplies abroad, with correspond- 
ing profitable returns to the South and the West 
and the continued high prices obtainable for the 



24 THE BANK AND THE TREASURY 

products of both farm and factory, that saved the 
day for American financial institutions. 

Falling Prices and Industrial Depression 

That the financial situation is still a dangerous one 

is apparent. And the danger lies not so much in a 

present or in an approaching crisis as in the continued 

use of a dangerous instrument of commerce. This 

danger is always present and will be so long as 

present practices continue. The recurring necessity 

for adjustments of credit to a lower 
The scaling of -, , , , ,, i • <• <• 

valuations level has been the chl f f source of 

financial disturbances in the past. 

This has been brought about by the repetition of 
speculative expansion and subsequent forced credit 
liquidation. Forced credit liquidations have re- 
sulted in declining valuation of assets and a lessening 
ability to meet credit obligations outstanding. 

The basis of credit judgment is estimated ability 
to pay. This estimate is arrived at by the use of that 
financial device known as a " balance-sheet," on one 
side of which are placed " liabilities" and on the 
other " estimated valuation of assets." The liabili- 
ties of a business concern are the "weights" used in 
adjusting the balances; they are fixed in amount. 
In arriving at financial condition, 
judgment™ % " liabilities " are placed on the right- 
hand side of the scales. Then on the 
other side of the accounting balance is placed "ap- 



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BANK-CREDIT IN LIEU OF CAPITALIZATION 25 

praisement" or "the valuation of assets." If the 
amount of the "valuation" exceeds the amount of the 
"liabilities," then there is recorded a "surplus." If 
the scales swing in the other direction there is re- 
corded a "deficit." This "surplus" (or "deficit") 
of value of assets over liabilities is the basis for judg- 
ment as to the value of securities and as to ultimate 
ability to liquidate credit. The basis for judgment 
of short-time demand-credit, however, is estimated 
value of "available" or readily "convertible assets;" 
these are weighed against "current liabilities." 

The depreciation or reduction in estimates of value 
placed on "industrials" alone during the first year 
after September, 1902, has been calculated to exceed 
three thousand million dollars. If other securities 
are included, the most conservative estimate of the 
amount of depreciation is beyond comprehension. 
The depreciation of securities in 1907 was even 
Contraction of greater than in 1902. With this 
credit-funds to level continuous scaling of estimates of 

of capital support u^^ q{ ^^^ gome business 

concerns have not been able to make the nec- 
essary adjustment. Several of the so-called 
"trusts" have become insolvent, and a number of 
others have admitted the speculative character of 
judgments on which their "prospectus" profits and 
prospective dividends were based by passing divi- 
dends. And, as in former periods of readjustments, 
depreciation (i.e., the scaling of estimates of value) 



26 THE BANK AND THE TREASURY 

of securities must continue until the earning capacity 
of the joint stock institutions has been demonstrated 
to be adequate to justify investment at a level of 
valuation which may be maintained. 

The greatest public danger to be feared from this 
sort of credit expansion and contraction is that spec- 
ulative gains may not be adequate or available to 
meet demands for credit liquidation when readjust- 
ment of the credit load becomes necessary. When 
the financial balance cannot longer be kept in ad- 
justment by exchange of "securities" owned against 
liabilities (i.e., by process of cancellation of liabilities 
of one concern against the liabilities of another), and 

the weight of liquidation falls on pro- 
The danger to be * , r • j • ^ i 

feared ducts of industry, in other words, 

when liquidation is forced into the 
market where " goods" are disposed of, then it may 
become necessary to readjust the whole industrial 
machinery to such a level of capitalization that net 
profits may give ample return on the capital liabilities 
represented in the balance-sheet. If this readjust- 
ment falls on a period of low productive returns (poor 
crops and low prices), as in 1893-96, then the reaction 
and reorganization becomes far-reaching. A period 
of financial readjustments is what we know as an era 
of commercial and industrial depression. It was 
such a condition that we had to face in 1893, after the 
speculative collapse of December, 1890, and the re- 
organization continued until 1897. Similar to this 



BANK-CREDIT IN LIEU OF CAPITALIZATION 27 

was the period of readjustment from 1884 to 1886, 
after the excesses of 1879 to 1883; and still further 
back may be found the long depression of 1873 to 
1878, after the speculative activities following the 
close of the War. And although every favoring cir- 
cumstance has been with us to support the inflated 
capitalization used as collateral to bank loans, we 
cannot say that we are yet on a safe and sure financial 
foundation. 

Demands jor Greater Elasticity . 

It is during such periods of credit contraction, and 
industrial depression that demands for " elasticity " 
may be found written on the editorial pages of news- 
papers and financial periodicals. At such time, 
"elasticity" is the term most often heard in public 

councils and in private financial dis- 
Definition of • rm i r .1 j •. 

elasticity cussion. Though frequently used it 

is a term accepted without definition, 
and understood by each to mean something that will 
afford him financial relief. Each person puts into 
the word a different content : to the man in commer- 
cial pursuit " elasticity" means ability to obtain funds 
for current use in the form of bank accommodation; 
to the banker it signifies ability to expand and con- 
tract his supply of money according to his own needs 
for payment; others take it to mean the ability of 
the Government to increase or decrease the general 
circulation. It is this failure to agree on the meaning 



28 THE BANK AND THE TREASURY 

of the first premise of their reasoning that makes 
agreement on a conclusion so difficult to reach. 

A proper understanding of the problem of elas- 
ticity must take into account the dangers of unwar- 
ranted and ill- supported expansion of bank-credit as 
well as the more obvious fact of contraction; those 
with whom lies the duty to pass remedial laws must 
seriously consider the interrelation of both forms 
of current funds, viz.: bank credit-accounts (the 
form of funds used by the business man), and money 
(the form of current funds necessary to the payment 
of balances by the banker). To the individual busi- 
ness man or to the individual banker, the problem 
resolves itself into one of the relation of " available 
Whatisneces- assets" (i.e., assets readily convert- 
sary to a proper ible into cash) to "current liabilities," 
consideration cmrmt demands for payment of 

cash. The exercise of sound discretion, with refer- 
ence to proposed measures of reform looking toward 
elasticity, however, requires that we know, not only 
the character of the demand, but also the financial 
machinery with which we are at present working 
and in which the readjustment is to be made. 



Chapter III 

THE AMERICAN SYSTEM OF CURRENCY AND 
BANKING 

For years the National Bank Act has been a sub- 
ject of general condemnation. The system of com- 
mercial banking operating under it has been pointed 
to as a patchwork — as an impotent device that has 
outgrown its original usefulness; it has been referred 
to as a financial crutch that from force of habit 
the country has been leaning on after convalescence. 
These critics have observed that our system differs 

from banking systems of Europe and, 
Critics of the i , . ■> , . . , , 

System Y ana l°g v > the conclusion is reached 

that our financial calamities are due 
to these differences. The champions of the National 
banking system, however, contend that in the same 
sense every institution is a " patchwork"; that the 
Bank of England is founded on and constructed of 
"patches" of legislation and administration, having 
grown out of the exigencies of war quite as truly as our 
own; that the Bank of France has been " patched" 
till little or none of the original fabric is left ; that the 
Bank of Russia, and, in fact, if cause for criticism 
be found in this, the financial systems of all coun- 
tries are to be brought under the same condemnation. 

[29] 



30 THE BANK AND THE TREASURY 

What the critics of the system have failed to see, 
and that which is most important, is that each of the 
great financial systems has been evolved from con- 
ditions quite different from our own; that it is from 
these differences of environment (if a biological figure 
may be used) that variety has been produced in 
financial concerns as well as in other forms of busi- 
ness life. Arising out of conditions peculiar to our- 
An evolution selves we have a distinctly American 
from American institution — an institution that has 
been gradually adjusted to our busi- 
ness needs. We have a banking system as distinctly 
our own as is our factory system, our railroad system, 
our school system, our Government. In so far as 
there is demand for change, it is in the nature of a 
further development of the institution — a further 
adaptation to meet the growing needs of a fast de- 
veloping and rapidly shifting business organization. 
With this statement of differing point of view in 
mind, it may be well to trace the distinctive fea- 
tures of the American system, then from the van- 
tage ground of the institution and its environment 
again to take up the thread of discussion as to the 
new adaptations proposed or that may be thought 
necessary. 

The Development o) American Banking Ideals 

At the time that the American colonies became 
embroiled in revolution with the mother country they 



THE AMERICAN CURRENT FUNDING SYSTEM 31 

had no commercial banks; they had no agencies of 
government adequate to financing the necessities of 
war, and none to meet the demands of a fast growing 
commerce. As a means of meeting the exigencies 
of military operations, resort was had to issues of 
colonial and continental public scrip and to foreign 
loans. When public credit failed, funds were raised 
by lottery and by temporary funding devices. Com- 
mercial and industrial paralysis left no occasion for 
organization in aid of private business till after the 
close of the struggle for independence. 

The country emerged from the revolutionary con- 
flict politically independent, but without money or 
credit at home or abroad. The people were without 
a currency other than that imported in the form of 
foreign coin; their paper currency had depreciated 
to a point that forbade other than speculative trading 
or barter; they were practically without adequate 
funds for public or private use. The welfare of the 

commercial classes on the seaboard 
The First Bank of , , , ,, L r t i L c 

the United States demanded the establishment of agen- 
cies of commercial credit; the country 
at large demanded a money that would pass current 
throughout the bounds of the nation. These two 
demands were met by the organization of a great 
central commercial bank — the first Bank of the 
United States. The circumstances of the time re- 
quired (i) that the obligations of State and Nation 
which had been incurred during the war be refunded 



32 THE BANK AND THE TREASURY 

(2) an institution of national scope which would 
give to the people a sound currency; (3) a bank with 
powers of discount equal to the volume of commer- 
cial credit used. 

With the expiration of the Charter of the first Bank 
of the United States, however, these situations had 
entirely changed. In the first place, the National 
debt had been refunded and the Government had 
been placed beyond necessity other than that which 
Why the First might be met by its current revenues. 
Bank was not re- In the second place, the controlling 
chartered interests of the people had shifted; 

from foreign trade to domestic commerce, from 
support of shipping to the development of land 
transportation, from merchandising raw materials 
and foreign products to the capitalization of home 
industry, from town building on the coast to the 
development of the resources of the interior the 
commanding interests of the nation were turned. 
The mint was supplying a uniform coinage for bank 
reserves; local banks were supporting local interior 
development. The first Bank fell with the party 
with which it was identified — the party of foreign 
trade, the party that drew its principal support from 
the seaboard commercial interests.. 

The War of 181 2 was a war directed against the 
New England coast towns. It was a war of the in- 
terior against the East. As against England, it was 
a failure; as against the East, the interior won a de- 



THE AMERICAN CURRENT FUNDING SYSTEM 33 

cisive victory; the enormous foreign trade interests 
of the North Atlantic seaboard were ruined. The 
The Second Bank National financial system was reor- 
oj the United ganized with the party of internal im- 
provements and home markets in 
power. As a means of permanently turning away 
from shipping interests and encouraging the up- 
building of home industry, the tariff of 1816 was 
passed. War had served either to destroy or had 
proved a temporary barrier to foreign commerce. 
The tariff of 18 16 was enacted as a permanent barrier 
to investment in international trade — a barrier that 
was raised higher and higher through several suc- 
cessive enactments. Party measures were pushed 
for the opening of interior transportation routes, and 
as a means of further strengthening the hands of the 
administration, the second Bank of the United States 
was established. The only banks that had remained 
on a specie-paying basis during the War of 181 2 were 
the banks of New England. The commercial rela- 
tions of the interior were in a chaotic condition; the 
Central Government was struggling under a new 
load of debt; the currency was disorganized and un- 
satisfactory; Treasury bills were at a discount. A 
National financial agency was again created, with a 
capital of thirty-five million dollars, to perform the 
double function of refunding the National debt and 
providing a sound commercial currency for the 
interior. 



34 THE BANK AND THE TREASURY 

As the Charter of the second Bank neared its 
close the scene again shifted. Before the Federal 
Government was in a position to lend adequate aid 
to the enormous demands from the interior for trans- 
portation and internal improvement New York had 
successfully financed the Erie Canal. With this 
event begins a new chapter in our financial history. 
Reasons for wind- No longer did local communities look 
ing up the Second to the National Government as the 
only agency adequate to carry on the 
internal improvements demanded. Besides, with 
the development of the resources of the interior, a 
new alignment took place which detracted still fur- 
ther from support of National as opposed to State 
enterprise. The industrial systems of the North and 
South worked to cross purposes. As soon as the 
uplands were utilized and cotton was made king the 
constituency of the cotton and tobacco belt was 
thrown against the tariff, while the industrial organi- 
zation of the North and West demanded its con- 
tinuance. 

The tariff contest finally resulted in compromise. 
Both sections, however, weakened in their support 
of " National" as opposed to " State" institutions 
and " State" activities. Internal improvements in 
each section were promoted from a State or local 
financial base ; the support of a National agency was 
not needed. The South demanded " States-Rights" 
a a measure of protection to its industrial and social 



THE AMERICAN CURRENT FUNDING SYSTEM 35 

system ; the North and West likewise organized their 
internal politics around State functioning, State im- 
Internal improve- provements, State banking, but held 
ments and State to tariff legislation for protection of 
an mg home-industry as against foreign 

competition and as a means of inducing invest- 
ment of capital in the development of interior re- 
sources. In all but tariff issues, therefore, ideals of 
local self-government carried the day as against the 
party representing National activities. Jackson rode 
to power in 1828 as the popular representative of the 
compromised " local" ideal, while Adams and Clay, 
representing centralized National functions, failed 
to retain political support. As a logical sequence, 
the second Bank — the instrument created to support 
centralized National activities, the federal institution 
— perished, and the whole financial system went over 
to a State basis. 

But evil days were ahead. The panic of 1837 and 
the depression following carried down local enter- 
prises. State banks and State flotation schemes of 
all kinds were brushed away like the paper issues 

which had preceded them. From 
The teaching's of , , . r ., . r , -. 

financial disaster the rmns of their own fortunes the 

people looked out on bankrupt cities, 

bankrupt towns, bankrupt counties, bankrupt States. 
Over eight hundred State banks were complete fail- 
ures, while all commercial credit institutions that 
survived within the area of the new development 



36 THE BANK AND THE TREASURY 

went over to a non-specie-paying basis; their issues 
passed for what they would bring. 

At the same time, the National party (the Whigs), 
by fusion with malcontents and with the "Ultra- 
States-Righters" — the "milliners" of the South — 
again gained control of the Central Government. 
Attempt to incor- Another measure was proposed by 
porate a third leaders for a third Bank to bring 
Federal bank Qrder to National financej to cur . 

rency and to commerce. But Harrison's death threw 
the administration into the hands of the "Ultra- 
States-Righters," the extreme advocates of localism; 
Congress, representing National functions, was 
powerless; the way was blocked till again local in- 
terests had readjusted themselves, till strong local 
institutional life reasserted itself in the election of 
President Pierce. 

It was in the midst of this chaos, following the 
panic of 1837, that the Independent Treasury was 
established as an institution designed to protect the 
finances of the Government against becoming in- 
volved in transactions and institutions of private- 
credit. It was out of this same chaos that our new 
"independent" institutions of private-credit arose. 
From the working of these two independent systems 
side by side, from experiment, and from adaptations 
made to current necessity and to business need, 
American banking ideals were developed. Before 
the Civil War had again thrown us into the turmoils 



THE AMERICAN CURRENT FUNDING SYSTEM 37 

of military contest we had passed through two more 

financial crises; two industrial depressions brought 

American banking ideals to the test, 
The local institu- n , , , , , . ,-, , 

tion retained and the adaptations then made, as a 

result, were again along distinctively 
American lines. With no purpose of reverting to a 
system of National commercial credit — with ideals 
of "local" internal improvement and " local" need 
for capital uppermost, with "local" interests, as op- 
posed to "National" necessity, the force present to 
give shape to enterprise and form to legislation — 
"local," "independent" banking in the various States 
was gradually reduced to a basis of safety and 
economy. 

The Suffolk system of New England had proved 
itself adequate to keep bank issues on a specie- 
Measuresto Paying basis during times of severe 

strengthen capi- strain — had sustained commercial 

talization -,., -, • n ,-, ,. ,-, 

credits when m all other sections they 

had failed. This was a system devised to protect 
"local" institutions when the forces of the country 
and of the Central Government were arrayed against 
them. From the Suffolk system was adopted the 
salutary principle of prompt redemption of current 
demand-credit obligations. The Free-Bank system 
of New York was distinctly the product of "local" 
and State as opposed to "National" financial in- 
terests; this was the result of the adaptation of "in- 
dependent" commercial credit institutions to the 



38 THE BANK AND THE TREASURY 

demands for internal improvement and for the de- 
velopment of the latent resources of a politically 
organized ' ' locality. ' ' 

By experience, and the application of the test of 
business necessity and convenience to each new de- 
vice, the States came to distinguish between the 
forms of credit used as " money" (forms which were 

Credit-money dis- *° P ass fr° m hand to hand without 
tinguished from question) and "bank credits-of-ac- 
credit-accounts count „ (credit _ funds prov id e d for 

private use, created by direct contract with the bank). 
The " independent " Free-Bank system was adopted 
by nearly all the States. The safety-fund, and the 
idea of collaterally secured circulation, was directed 
toward the correction of the "unsoundness" of the 
"money" system under a practice of "independent" 
commercial bank issues; collateral security for notes 
was introduced to serve the double purpose of giving 
a market to "local-improvement" stocks and bonds, 
and at the same time of avoiding the necessity for 
holding coin reserves against notes outstanding; the 
safety-fund came to be a marginal coin reserve to 
insure payment in full in case of failure and on 
forced sale of securities. 
The business importance of the distinction between 
"money issues" and bank "credit- 
dTsmctia7° ftH accounts"used as funds found expres- 
sion in the distinctly different provision 
for the payment of each of the two forms of demand 



THE AMERICAN CURRENT FUNDING SYSTEM 39 

obligations of the banks. The "safety-fund" and 
" collateral security " were devoted entirely to the 
support of " credit-money, " or notes of the banks; 
a first lien on general assets was also added for 
further security of bank " money issues." But such 
provision for the security of the " money-funds' ' 
left the bank free to provide or not to provide for the 
redemption of its "credits-of-account." As a means 
of protection to book-credits, a " money-reserve' ' re- 
quirement was introduced and a system of inspection 
was established to protect the people against financial 
impotence and fraud. The necessity for capital (the 
necessity for invested funds as equipment for a busi- 
ness institution offering credit-funds to a community) 
came to be recognized and laws were passed to pre- 
vent banking without capital-resources, or what was 
known as "wild-cat" banking. In all of these adap- 
tations, however, in all of the legislation and provis- 
ions for administrative control the leading idea was 
one of local need, local service, local development, as 
opposed to "National" necessity or "paternalistic" 
enterprise. 

The Separation oj the Institution of Money 
Issue from that of Credit-Account 

Fortunate it was for our financial system that the 
Civil War occurred at a time when banking ideals 
had come to be so well crystallized and when the 
necessity for a common currency had come to be so 



40 THE BANK AND THE TREASURY 

generally felt. We were quite ready to have a uniform 
practice, a common law, a central administration along 
Establishment of lines of previously proved experience 
a strictly Ameri- — a system that would preserve all 
can system of the sa i utary principles worked out 

under American business conditions, and one which, 
by uniformity, was adapted to a wider commercial 
activity. The complete taking over of the money 
functions by the Treasury, under necessities of war, 
and the reorganization of our independent com- 
mercial-banking institutions under the National Bank 
Act, were the last steps in the final establishment of 
the American system of currency and banking. 



Chapter IV 

CREDIT-MONEY AND THE NATIONAL BANK 

Again attention is called to the fact that banking 
ideals in America had developed from strictly Amer- 
ican conditions; that as a result we had worked out 
a system unique ; also that intelligent banking opinion 
was fairly well settled at the time the nation found 
itself in the throes of civil strife. We were still 
suffering from the results of the panic of 1857, and 
there was engraved on the memories of older bankers 
the record of failures in 1837 and 1847. The nation 
also realized, as a matter of experience, that these 
years of financial failure each had been followed by 
an era of industrial depression and financial reor- 
ganization. It was commonly believed that lack of 
uniformity in laws, conflicts of systems, and rival 
advantages offered to incorporators by one State 
bidding against another, under conditions favoring 
loose banking practice, had contributed to this con- 
fusion. Before the greenback came to take a prom- 
inent part in our circulation, the credit-money of the 
nation, in the form of " notes-of-hand " (issues of 
State banks), were in such condition that one doing 

[41 J 



42 THE BANK AND THE TREASURY 

business was required to keep constantly before him 
a current list of quotations as to prices of "bills," 
and then he ran the risk of loss in exchange. Still, 
Confusion in the advantages found in the local in- 
credit-money at be- dependent institution for fostering 
'ginning oj War « local „ inte rests were so great that 
all this confusion and loss could be suffered with 
scarcely a suggestion of return to central banking — 
to a central " Federal" institution with its large capi- 
tal, its branches, and its uniform currency. Even 
during the War, when Federal ideals were strong, 
there was no large business interest ready to advocate 
or even listen to proposals for a central Federal bank. 
In fact, it was the fear that such might be the out- 
come of a Federal law which stood for a long time in 
the way of establishing a uniform National system 
in conformity with existing ideals. 

Conversion of the Treasury into an Exclusive 
Agency of Credit-Money-Issue 

When the Government found itself confronted by 
the necessity of supporting armies in the field, when 
it became necessary to, maintain an armament with 
a fighting force of half a million, when its expendi- 
Issues of Govern- tures amounted to millions per day, 
ment credit for it found itself equipped for such an 
currency undertaking with an independent (but 

empty) Treasury, and with a commercial-credit sys- 
tem entirely divorced from the Federal State; the 



NATIONAL CREDIT-MONEY AND THE BANK 43 

finances of the country were organized on independ- 
ent commercial lines rather than on those intended 
for Government service. The conversion of this 
empty independent Treasury into an active financial 
agency to provide current funds for the Government 
became a matter of necessity, and as the easiest and 
most expeditious way of providing such funds the 
Treasury assumed issue functions. 

The notes (demand-credit obligations) of the 
Treasury entered into circulation in competition with 
the mixed and inefficient system of bank-note cur- 
rency. At first (as demand obligations for the pay- 

Govemment credit ment of g old and silver ) the y passed 
becomes money at par. Later, being valued at less 
than specie-paying bank-notes, they 
were made legal-tender to give them currency. Be- 
fore the Legal-Tender Act, the commercial-credit 
system passed over to a Government " paper stand- 
ard. " The banks, failing to provide a " coin-reserve " 
for the redemption of their demand obligations, im- 
mediately accepted the situation. They provided 
themselves with a cheaper form of money for re- 
serves and sold their coin, using instead issues of the 
Treasury for the redemption of notes.* 
At first, from National necessity, Treasury-notes 

* This practice became general with banks in every section except the 
Pacific Coast. The practice was systematized in the East by action of the 
principal Clearing-House Associations; Boston was the last of the large 
cities to adopt the United States note as a standard for payment. August 
27, 1861, that Association voted that any bank which might conform to 
the agreement entered into by the banks in New York and Philadelphia, 



44 THE BANK AND THE TREASURY 

were issued in settlement of demands against the 
Government; after the issues of the Treasury had 
been accepted by the banks as a standard for pay- 
ment of their own credit-accounts the notes of the 
Displacement of Government were found preferable to 
the State bank- the diversified issues of banks. Gov- 
ernment issues at least provided a 
uniform, and therefore more acceptable form of 
credit-money. This preferment on the part of the 
banks, this decision to accept United States notes as 
reserves, this better service rendered by the Treasury 
as an agent of money-issue, paved the way to the tax 
which eliminated the credit-issues of banks from our 
money circulation* From that time to the present 
all our " credit-money" has been issued by the Cen- 
tral Government, the banks confining their credit 
activities entirely to commercial functions, using the 
credit-money-issues of the Government for their re- 
serves. From that day to this the American money 
question has been an entirely separate and distinct 

with reference to the National loan, could deposit with the Clea ring- 
House Committee "Treasury-notes" of that loan and receive in exchange 
certificates of the "loan committee" to an amount not exceeding ninety 
per cent of the par value of such Treasury-notes. These certificates were 
to be received at the Ciearing-House in settlement of balances. The 
notes were later adopted as a basis for payment in lieu of "coin." 

*True, the ten per cent tax imposed on State bank-notes was the im- 
mediate cause of the retirement of State bank-notes. But if the green- 
back and the National banking system had not been considered more 
advantageous, the opposition of banks would not have been lessened, 
and, furthermore, existing institutions would not have voluntarily ac- 
cepted the change. There can be no doubt that the uniform system of 
greenbacks and " Government " bank-notes was in every way more 
acceptable and more serviceable to the people than the complicated, 
hazardous, and uncertain system of independent bank issues. 



NATIONAL CREDIT-MONEY AND THE BANK 45 

one from the American commercial banking problem, 
and every attempt to treat the two questions without 
distinction has led to confusion of thought. 

The Creation of a Uniform System of 
Commercial-Credit 

In the reduction of our " commercial-credit " to a 
uniform system the same National necessity was the 
immediate cause. It was the need of the Govern- 
ment for current funds that reduced credit-money- 
issues of the country to a uniform basis in the Treas- 
ury-notes; it was the continuing public need for 
A national bank- current funds that finally gave us 
ing system from uniform institutions of commercial- 
public necessity ^^ Secretary Chase saw in the 

commercial bank the possibility of an enlarged mar- 
ket for bonds. The practice among the States under 
the Free-Bank system suggested a practical method 
for utilizing this market. 

Before this could be done, however, it was neces- 
sary to incorporate the many " local" banking sys- 
tems under National law. But to make such a 
National system a success would require voluntary 
consent on the part of both banks and bank patrons. 
Incorporated the General respect and voluntary con- 
best American sent must be gained through devising 
experience a Nat i ona i j aw ^ wou ld serve the 

commercial purpose better than had the mixed and 
uncertain State-bank systems. The inducement to 



46 THE BANK AND THE TREASURY 

voluntary consent which Secretary Chase and his 
advisors offered was a National Banking Law, into 
which were incorporated all of the most wholesome 
measures — the best banking ideals that had been 
evolved during nearly half a century of independent 
commercial banking experience. These ideals were 
brought together and welded into a consistent plan 
— one that commended itself both to bankers and 
to established business interests. 

The manner in which this law represented and 
still represents the "local" ideal is caught from the 
language of ex- Comptroller Dawes, in a recent speech 
before the Kansas Bankers' Association: "It has 
been built up, not from some central institution com- 
bined with numerous branches which discourage the 
banks in small towns, but has been built up from 
Organized fifteen thousand differentiated banking 

around local, units, until in banking, as in other 
banking needs great industries of these United States 

of ours, is coming a day of commercial domination 
of the world. It is the little men whom we have 
protected in this Government." The National bank- 
ing system is a part of that National policy evolved 
"to let the little men get on in the country, in order 
to let the little bank get into operation, in order to 
let the little manufacturer get into operation, and to 
not cut off from their credit those people who, start- 
ing from small beginnings, have brought us into this 
great prosperity which we all enjoy and which is so 



NATIONAL CREDIT-MONEY AND THE BANK 47 

widely and evenly distributed throughout this great 
country of ours." 

The American System oj Sound Money 

The American credit-money-system, in its final evo- 
lution, is essentially a system of Government obliga- 
tions for the payment of gold on demand. In the 
effort of the American people through the last cen- 
tury to obtain a " uniform" currency, the Independ- 
ent Treasury has been maintained, and has finally 
become the only institution of credit-money-issue. 
Uniformity of valuation of all our money-issues is 
secured through this central institution by a process 
of immediate redemption. In the interest of " sound 
money," and as a provision directed toward meeting 
the demands for gold payment arising out of these 
credit-money-issues, a gold-reserve is set aside in a 
special department of the Treasury known as the 
Department of Issue and Redemption. Here is kept 
the $150,000,000 gold-reserve; here all demands for 
gold obligations arising out of credit-money-issues 
may be presented and honored ; here, in fact, and in 
practice, all forms of money are made inter change- 

Credit-moneys a ble. If the holder of silver wishes 
issued and re- i i 1 1 »i 

deemedbytheNa- greenbacks he may exchange silver 

tional Treasury for notes ; if he has gold, and for con- 
venience wishes silver certificates, these may be had ; 
if he has any form of money other than gold, and 
wishes standard money, he may obtain this in ex- 



48 THE BANK AND THE TREASURY 

change, at par, without discrimination. Thus every 
form of money is issued by the Treasury, and 
all forms other than gold are made demand obliga- 
tions for gold payment. Furthermore, the means of 
meeting these obligations are at hand: first, in the 
form of a " reserve" large enough to meet current 
demands, and, second, by making the credit-money- 
issues redeemed a first lien on the general resources 
and revenue powers of the Government. These 
credit-money- issues of the Treasury are made legal- 
tender for the payment of commercial-credits. 

The American System 0} Banking 

The American banking system, on the other hand, 
is essentially an independent institution of commer- 
cial-credit. It has for forty years been entirely di- 
vorced from money-issue functions, except as an 
agent of the Government for the conversion of bonds 
An independent ^° demand notes. The service that 
system of com- it renders is one of furnishing com- 
mercial-credit merc { 3 \ credit-funds to its business 

constituency in the form of book-credit accounts. 
The legal- tender " credit-money- issues" of the 
Government are contracts to pay gold coin; the 
Comparison of ' ' commercial-credit-accounts ' ' offered 
money and bank- to the public by the banks are con- 
%ng systems tracts to pay i ega i_ tenc ier money. The 

Independent Treasury protects the "credit-money" 
system by maintaining a " reserve" of gold. As 



NATIONAL CREDIT-MONEY AND THE BANK 49 

all the reserves and the revenue power of the 
Treasury are organized for and directed toward the 
maintenance of a convenient form of legal-tender 
money in its integrity, so it is intended that the com- 
mercial bank shall protect its " demand-credit-ac- 
counts" by keeping a money- reserve adequate to 
meet current demands, fortified by all the capital- 
resources of the bank. It has come to be recognized 
that the bank's service to the country is not one of 
" money-issue." When money is needed, a customer 
cares not whether it is in bank-notes, greenbacks, 
gold certificates, or notes of 1890, so long as it is 
"sound;" i.e., so long as he knows that he may 
obtain gold or something as valuable on demand. 
He may obtain "money" as cheaply from a Treasury 
office as from a bank. 

The chief service of the bank is one of purchasing 
good, sound, commercial paper offered for sale in the 
community as a means of obtaining funds to meet 
the current needs of enterprise, and (as the most 
convenient form of funds) to be able to give "good, 
sound, commercial bank-credit" in return. Under 

a system which permits the banks to 
The i)ublic scT- 
vice of the bank issue notes-of-hand, the reason that 

the bank gives to its customers funds 
in this form is that it is to the bank's advantage to 
do so, and not because the customer prefers the 
bank-note to Government issues. But the American 
business public has found that, in over ninety per 



50 THE BANK AND THE TREASURY 

cent of its business, funds in the form of a " bank- 
account" are more convenient to the customer, and 
they have seen fit to take away from the bank the 
power of money-issue in the interest of public safety. 
Under our system, the commercial bank, being de- 
prived of credit-money-issue privileges, renders two 
services: (i) It furnishes a market for commercial 
paper; (2) it furnishes a form of credit- funds more 
convenient for use than money itself. 

But the public is quite as much interested in know- 
ing that the credit-accounts of banks will remain 
" sound' ' — i.e., will be paid on demand in "sound" 
legal-tender money of the Government — as it is 
that the Government shall furnish "sound" legal- 
tender money, for under the law of greater economy, 
over nine-tenths of the business is done on this form 
of obligation when protection is given against "un- 
sound" banking. The method employed under this 
Need for sound- unique American system of independ- 
nessin bank- ent commercial banking is to require 
banks to maintain their capital-re- 
sources unimpaired, and to keep a "reserve" of 
legal-tender currency sufficient to protect the accounts 
which they have sold to the public for business use. 
When thus protected we have a system of credit 
thrice compounded: (1) a system of Government 
" legal- tender credit-money-issues" based upon the 
gold standard; (2) a system of "commercial bank- 
credit-funds" (book-accounts) based on legal- tender 



NATIONAL CREDIT-MONEY AND THE BANK 51 

money; (3) a system of " business-credit " looking to 
the bank-account for means of payment. It is the 
current opinion that under the American system, 
through the Independent Treasury, we have already 
secured to ourselves a "sound money"; the problem 
now before us is one of securing for ourselves " sound 
commercial bank-credit." 

The So-called "Issues" of National Banks 

To this conclusion and summary one objection 
will be urged, viz., that the banks called National 
banks have retained issue functions. This conten- 
tion will not be admitted, and in this lies one of the 
minor financial fallacies of the time. As an institu- 
tion of commercial-credit, our National bank is not a 
bank of issue. It would be as logical to call banks, 
which deposit gold and receive in return gold- 
Clearing-House-certificates, banks of issue ; it would 
be as justifiable to so regard a State bank or private 
bank that has deposited gold, silver, or currency in 
the Treasury and received certificates to represent 
them. Bank-notes, it is true, are at present a form 
of money, but, for the issue of these, the bank occu- 
pies a position of agency of the Government for the 
Banks an agency of conversion of bonds into notes. The 
the Government for note-issue power was not intended 

bond conversion i* • • i 

as a means of meeting a commercial 
demand; it was given purely as an accommoda- 
tion to the Government for its own ends. As a 



52 THE BANK AND THE TREASURY 

means of creating a bond-market when the Treasury 
was in need of coin the bank was allowed to buy 
coin bonds, i.e., to exchange gold, or gold market 
equivalents, for bonds ; then (on depositing the bond 
thus purchased with the Government as security to 
a promise to deliver a definite amount of money to 
the Treasury) the bank obtained a form of paper 
money, called " National currency' ' or bank-notes, 
for use in its business, receiving the interest on the 
bond as an inducement for the exchange. 

The Government issues the bank-note in the same 
sense that the Clearing-House issues Clearing-House 
loan-certificates. These notes are not bank-credits 
issued in the course of a commercial banking busi- 
ness. The value of the note does not rest on the 
credit-contract of the bank, but on a contract with 
the Government which in turn rests on the collateral 
securities deposited with the Treasurer, i.e., on Gov- 
ernment credit. The notes were not " issued" by 
the bank, but were purchased or borrowed from the 
Government, and as a form of money the immediate 
Government cos ^ to the bank is more than that of 
issues notes to any other form of money obtainable. 
the banks j t ig t h ere f ore thoroughly misleading 

and tends to involve the subject of currency and 
banking in mystery to speak of this form of currency 
as bank-money. It is quite as misleading to attempt 
to align this practice with any experience under other 
systems of banking in discussion of "elastic bank- 



NATIONAL CREDIT-MONEY AND THE BANK 53 

issues." Under the American system the National 
" bank-note" is a form of money issued by the Gov- 
ernment to and through the bank as a corporate 
agent of the Government. 



Chapter V 

THE DEMAND FOR A " SOUND" AND "ELASTIC" 
SYSTEM OF BANK-CREDIT 

The solution which we have given to the problem 
of " sound money" has been by taking our money- 
issues entirely out of the hands of private concerns 
and putting them under a department of Govern- 
ment. By so doing, however, we have left our 
Opinion as to "commercial-credit" entirely in the 
need for greater hands of private individuals and cor- 
easiciy porations. That greater elasticity is 

needed and that some change should be made in the 
National Bank Act to this end, all are agreed. Opinion 
differs only as to what the character of this change 
should be. And this difference grows out of a differ- 
ence of view as to the method by which elasticity in 
credit obligations may be attained without restricting 
business accommodations. 

Two Schools of Banking Opinion as to Method of 
Obtaining Elasticity and Sound Banking 

Proceeding from the assumption that greater elas- 
ticity is needed as a common point of departure, 
argument has gone out on two distinct lines ; bankers 

[54] 



"sound" and "elastic" BANKING 55 

have divided into two schools of opinion diametri- 
cally opposed. The one has reached the conclusion 
that "branch-banking" and "cur- 
otnsoj ifler- renc based on commercial assets" 

will secure the desired end ; the other 
has as zealously urged "independent banking" and 
"credit-accounts" (deposits) based on independent 
and adequate capitalization. On examination of 
the arguments used by these two schools there ap- 
pears not only the fundamental difference in their 
appreciation of the relation of the problem of "elas- 
ticity" to financial "soundness," but the reasons for 
this divergence in conclusions as to the remedies to 
be applied are also apparent. Taking premises for 
argument there has been a wide difference in their 
conception of the "system" to be modified, and also 
a lack of agreement as to the form of "bank-credit" 
to which elasticity is to be given. 

The " Commercial Assets" Banking School 

Mr. Eckels, representing the ideas of the "branch- 
bank", "commercial assets banking" constituency, 
has refused absolutely to take into account the fact 
that we have in America a system that has grown out 
of American conditions, and therefore one that must 
be considered from the standpoint of further adap- 
tation to American financial and industrial interests. 
He and his followers show that branch-banking has 
produced good results in other fields, and conclude 



56 THE BANK AND THE TREASURY 

that it would also produce equally good results if 

grafted upon our own industrial plant. They show 

that the bank-note circulation of Eng- 
Character of their -, n n ,, , x . , 
claims land, Scotland, Ireland, Germany, 

Canada, etc., has adjusted itself to in- 
creased and decreased business demands for current 
funds ; it is therefore assumed that the English or the 
Scotch or the German branch-bank would work here 
better than our own system of decentralized, inde- 
pendently capitalized banks. 

This reasoning from analogy might have been put 
with convincing force if they had first shown that the 
American business demand and the American bank- 
ing system were the same sort of demand and a 
system similar to those from which their analogies 
are taken. Their fundamental error lies in failure 

to appreciate that there are no par- 
Fallacy of reason- ■,-, , . .,, T ,1 r , 1 ,1 

ing from analogy allels m either ' In the first P lace > the 

discussion is not with reference to an 

English system of banking, a Scotch system or a 
German system; what we have to do with is an 
American system. In the second place, the form of 
"bank-credit" demanded by the American business 
man is not a bank-note, but a " credit-account " for 
the use of the customer of the bank. To show by 
direct quotation Mr. Eckels' line of departure : " Com- 
merce wants (1) a note-issue which is sound, and (2) 
one which from day to day in its volume meets, not 
only in the cities of great commercial undertaking, 



«pnTT>m" ATK.T-TN < ' T^T A OrpT/^ ' > 



SOUND 77 AND "ELASTIC BANKING 57 

but upon the frontier and in sparsely populated 
places, the needs of the people in their transactions, 
. . . in their transferring of property from one to 
another." This is the first premise in the reasoning 
of the " commercial assets banking" school. 

All admit, and our whole past history supports the 
conclusion, that the American people wish a "sound" 
credit-money when they wish credit-money at all; 
but it is affirmed by Mr. Eckels 7 opponents that his 
assumption is wrong when he further says that the 
American people wish a "note-issue upon the part 
of the bank." This, it is urged, is what the Ameri- 
can people have been drifting away from since 1837, 
Note-issues for an d wna t they completely abandoned 
the use of the forty years ago. The American peo- 
ple have not seen an "issue" of a 
bank — using the word in the same sense that Mr. 
Eckels uses it in his analogies drawn from Canadian 
and European practice — since the Civil War. The 
school which he represents fail to appreciate the 
fact that the American people have completely di- 
vorced their system of "credit-money-issue" from 
their system of "commercial-bank-credit." 

The "Capital Assets" Banking School 

The other school is ably represented by Mr. 
Dawes. While in a measure this school has failed 
to appreciate the full import of the institutional dis- 
tinction between the American and other systems, 



58 THE BANK AND THE TREASURY 

in their reasoning about "elasticity" they have pro- 
ceeded from a proper appreciation of the form of 
Bank-accounts circulating medium demanded. Quot- 

used by business ing from Mr. Dawes for a statement 
community of ^ yiew . « what fa ^ most im _ 

portant function of a bank? It is not the note- 
issuing function . . . the most important function 
which banks exercise in any community is that of 
producing purchasing power [credit-accounts of cus- 
tomers] in that community. ... By that method 
through those simple operations of banking [the 
purchasing of commercial paper and giving to the 
customers, in exchange, accounts on the books of 
the bank], there has been built up in this country 
to-day a purchasing power of something over nine 
billion dollars, whereas the total amount of Govern- 
ment money in circulation — gold, silver, and paper 
— is about $2,250,000,000. It is the check and 
draft circulation against that tremendous credit 
balance which furnishes the currency [current funds] 
with which over ninety per centum of our total trans- 
actions are done. . . . We have in this country the 
most elastic currency which the world has ever 

known, in this check and draft cur- 
Elasticity in -^.1 , i • 1 1 

credit-accounts renc y- ' ■ ■ Dld y ou ever thmk how 

elastic the check and draft currency 

of the United States is? Why in the year 1900 the 
clearances of the city of New York alone were thirty- 
one billions of dollars — not millions — thirty-one 



Up.rtTT,.™)) AT..TT-W (' T-.T A r.rTVT/-l H 



SOUND" AND "ELASTIC BANKING 59 

billions of dollars greater than they were in 1897, 
and they were five billions of dollars less in 1900 than 
they were in 1899. Just think of the elasticity of 
that magnificent currency which has been built up 
in this country by this system of differentiating bank- 
ing among the fifteen thousand banks scattered over 
these United States." 

Recognizing that the chief service rendered by the 
commercial bank is one of providing its customers 
with credit-accounts (deposits) for business use, this 
second school of banking opinion have strongly im- 
pressed on their faith, that there is at present no 
limit to the elasticity of the form of funds in current 
use except that imposed by the bank itself; elasticity 
is limited only by the amount of capital support 
given to accounts outstanding. They strongly advo- 
Limit to elasticity cate increased financial " soundness" 
imposed by banks as a remedy for inelasticity, and as a 
themselves mea ns to this end they further advo- 

cate the principle of banking on the " capital re- 
sources" of the bank instead of doing business with 
" issues" based on " commercial assets." 

Since the exchange of credit-accounts for com- 
mercial paper is the chief business of the bank, and 
The limitation since these credit-accounts (deposits) 
one of " sound- are the chief form of funds used in 
the community, the underlying pre- 
mise of their belief is that the first duty of the bank is 
to make these credit-accounts "sound." Soundness 



60 THE BANK AND THE TREASURY 

is here used in the same sense that it was understood 
to mean in the recent money controversy. The bank- 
account is sold to the customer (or exchanged for his 
note) to be used as current cash in his business. 
What the customer wants to know is that it is as 
good as gold. And what the bank must do to insure 
this result is to be able to redeem its credit-contract 
on demand. 

The "Soundness" of a Bank's Credit 

There are two ways in which credit-contracts may 
be met; viz., by "payment" and by " settlement." 
Payment is the satisfaction of a credit obligation by 
delivery of the amount of money contracted for. 
Two methods of Settlement is the satisfaction of a con- 
satis fying a credit tract for future delivery by a new 
o tga ton contract or acceptance, in lieu of de- 

livery or payment. Ability to pay depends on the 
ownership or possession of money, or something 
which can be converted into cash, for delivery when 
the credit-contract is due and demand is made; 
ability to settle depends on the power of the one 
obligated to offer something which will be acceptable 
to the creditor in lieu of legal- tender money. 

In campaigns for currency and banking reform, 
these two methods of satisfaction of credit-demands 
have been the first premises of the two opposing 
schools of financial thinking. Recurring periods of 
relapse from speculative excess, cycles of decreasing 







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"sound" and " elastic" banking 61 

assets and proportionately increasing liabilities, have 
caused issue to be joined between them. The school 

The dividing line in which have pleaded for reform based 
campaigns for finan- on ability to pay, have styled their ar- 
cial soundness g^nt a plea for financial "sound- 

ness." The school which have urged measures for 
settlement, without being required to fulfil their con- 
tracts for future delivery of money, have been char- 
acterized by their opponents as "inflationists." But, 
whatever may be chosen as terms properly to repre- 
sent these two financial creeds, it must be recognized 
that each is an attempt to solve the problem of liqui- 
dation — the one, by the introduction of methods 
which will insure a larger proportion of assets to 
credit issued, the other, by a provision for new issues 
of credit liabilities to meet those already outstanding. 
It may be further observed that, in all of these con- 
tests, the one school have stood for the strict fulfil- 
ment of existing contracts, and have sought to protect 
business against the evil of future excesses of credit- 
issue, while the other school have sought to obtain re- 
lief from a present emergency, arising out of demands 
for the delivery of money on existing contracts of 
credit. 

In 1893-96, attempt was made to solve the prob- 
lem of liquidation by establishing 371.5 grains of 
silver as the standard of payment of existing liabili- 
ties and for the valuation of assets. With the price 
of silver as it then stood, this device would at once 



62 THE BANK AND THE TREASURY 

have doubled the proportion of assets to credit liabili- 
ties, and would have made liquidation easy. Two 

successive political campaigns re- 
T he sound money j ■, . . r ,, , ■, , , 

controversy corded victory for the gold standard; 

and all future doubt as to the ability of 
the Government to liquidate its credit-money obliga- 
tions, by payment according to the standard, was set 
at rest by increasing the assets of the Government 
available to meet gold demands. These questions 
are now considered settled, but a new period of liqui- 
dation brings with it a similar controversy with re- 
spect to the credit-accounts of commercial banks. 
On questions of public policy, opinion is again di- 
vided between the same schools, representing the 
same ideals that have contested for supremacy 
throughout the last two centuries. 

The Demands o) the Two Schools of Banking Reform 

A re-statement of their respective demands may 
lend clearness to the presentation of contending 
faiths. To give greater facility to the liquidation of 
bank- credit liabilities, the one school argue: (i) for 
authority to issue new promissory notes in settlement 
D nd f th °f crecn t-accounts outstanding; (2) for 
" commercial as- a first lien on the general assets of the 
set l " } ankin Z bank to secure the ultimate payment of 
these notes ; (3) for the abolition of the 
Sub-Treasury; (4) for the "deposit" of all revenues 
of the Government in the commercial banks, without 



U o^-r-r-K-r-r. )) ., TT , ( C t-, x a o^t>-i " 



SOUND" AND " ELASTIC" BANKING 63 

collateral security; (5) for the right of banks to es- 
tablish branches, without requiring a proportionate 
increase of capital-resources to liabilities. 

The arguments offered in support of these several 
demands are in brief as follows: (1) That authority 
to issue notes will relieve the banks from the necessity 
of obtaining legal-tender money for delivery in time 
Arguments sup- °f unusual demand for liquidation of 
porting these de- bank-credit, and will thus relieve ex- 
traordinary pressure on the money 
market; (2) that a first lien on the general assets of 
the bank, to secure the ultimate payment of notes 
issued in settlement of outstanding credit-accounts, 
will keep the bank-note as "sound" as the issues of 
the Government, and will protect it as well as if 
secured by a deposit of Government bonds; (3) that 
the abolition of the Sub-Treasury system will prevent 
money being abstracted from the regular channels of 
trade when there is a surplus of Government revenue 
over expenditure ; (4) that by " depositing" the reve- 
nues of the Government with the commercial banks, 
these " deposits" may be used to support still larger 
volumes of credit-accounts, and increase the available 
funds of the community; (5) that by a system of 
branch-banking, capital will be given greater " fluid- 
ity," — i.e., the money of the bank may flow from 
one part of the country to another as it may be 
needed. 

Answering these contentions, the other school of 



64 THE BANK AND THE TREASURY 

banking opinion urge that all this is a plea directed 
towards weakening the capital-resources of the banks 
on the one hand, and for permission to avoid payment 
of credit-accounts outstanding on the other. Further 
enlarging on these views, they argue that authoriza- 
tion to issue new notes in settlement of demands for 
Arguments for delivery of money made on-account 
"capital assets" is a means of avoiding payment, and 
an mg in its effect not only prevents such a 

readjustment of assets to liabilities as is necessary to 
" sound banking," but tends toward a still larger 
inflation of credit, at the vety time when assets are 
being scaled by the exercise of more conservative 
judgments of valuation — i.e., when ability to con- 
vert assets into cash for delivery on credit-demands 
is being reduced. It is also pointed out that the 
security offered for note-issues, in the form of a lien 
on the general assets, not only decreases the need of 
capital-resources, but at the same time tends to 
weaken still further the support to bank-credit-ac- 
counts — the kind of funds in most general use — 
and to weaken public confidence in the whole bank- 
ing system; the immediate effect of this weakened 
confidence is to lessen the opportunities of the bank 
to render a service in the community out of which it 
obtains its revenue. They urge that the Sub-Treas- 
ury, instead of being an element of weakness, is an 
element of strength in two ways : first, by segregating 
the public funds, the necessity for larger bank capi- 



"sound" and "elastic" BANKING 65 

talization is increased; and, second, by storing up an 
independent reserve in time of low money-demand, 
an independent money-reserve is at hand which may 
be made available to the banks in time of monetary 
strain. In support of this last contention, they point 
to the wholesome influence of the Sub-Treasury in 
the recent disturbances, such as the Baltimore and 
St. Louis panics, at which times the bank situation 
might have proved disastrous to the business of the 
whole country, had it not been for the aid of the 
Government. 

As to the so-called "deposits" of Government- 
moneys in the banks, they show that these are noth- 
ing more or less than loans to the banks without 
interest. In this relation, it is further urged that the 
only reason why the Government or anyone else 
should purchase a bank-account is to obtain funds 
for current use in a form more convenient than 
money; that the only need of the Government for 
such funds is represented in the accounts of disburs- 
ing officers — about $6,000,000. They hold, there- 
fore, that the ever- increasing loans of the Govern- 
ment to the banks (in the early part of 1904 amount- 
ing to about $170,000,000) put a premium on their 

Increased "elas- relying on the paternal support of the 
ticity" through n-> 1 e 1 t 

increased capital Treasury, instead of depending on 

strength their own capital-resources for the 

cash needed in the liquidation of their own accounts 
— i.e., for money-reserves. Again, it is urged that 



66 THE BANK AND THE TREASURY 

the demand for branch-banking is inspired by this 
same motive — the desire for still further lessening 
the capital cost of doing business, which, if accom- 
plished, would result in again weakening the need 
for capital contributions by the stockholding pro- 
prietors of banking corporations. 

This second school would secure elasticity in quite 
another way. Their underlying principle is ex- 
pressed by Mr. James G. Cannon: " Bankers some- 
times plead for more elastic currency, but what is 
needed is more elasticity of the assets of the bank; 
what is wanted are assets that are readily convertible 
into cash in time of panic, which will pay depositors, 
and at the same time permit new loans." This 
Adequate capital- statement sets out in strong relief the 
resources the so- irreconcilable premises of the two 
classes of thinkers; the one urging a 
right to increase liabilities still further when their 
assets are already inadequate to support outstanding 
demand-credit; the other urging an increase in capi- 
tal-assets — those assets readily convertible into cash 
without curtailing loans. 



Chapter VI 

THE RELATION OF BANK CAPITALIZATION TO 
THE PROBLEM OF ELASTICITY 

Although the relation of capitalization to the 
problem of elasticity is an indirect one, its importance 
has been overlooked by those who have had remedies 
to propose. As before observed, "elasticity of 
credit-accounts " and of banking accommodations is 

Distinction be- the desideratum; and elasticity of 
tween" wild-cat" -,., j j j 

and 11 sound" credit-accounts depends on an ade- 

banking quate equipment of the bank with 

" available' ' or "convertible" capital-resources. The 
assets, which are available without "forcing" or 
curtailing loans, are those that are obtained by capi- 
tal expenditure ; in fact it may be said that this is the 
chief end for which the capital of a banking institu- 
tion is obtained. The provision of "capital-assets" 
instead of "commercial-assets" as a basis for bank- 
credit (whether in the form of notes-of-hand or bank- 
credit-accounts) is the essential distinction between 
the "wild-cat banking" of the past and "sound 
banking." 

This is another way of stating the controversy be- 
tween the two schools of banking opinion represented 

[67] 



68 THE BANK AND THE TREASURY 

by Mr. Eckels and Mr. Dawes. While it may not 
be said that Mr. Eckels favors " wild-cat" banking 
(i. e., banking without capital), the conclusion reached 
by his critics seems warranted that all of his proposals 
are in the direction of weakening the capital support 
given to asset liabilities outstanding. An application 
of his proposals, therefore, would be in the direction 
of wild-cat banking. Mr. Eckels argues for bank- 
ing on " commercial-assets," i.e., making the current 
credit obligations of the bank depend on the converti- 
bility of loans and discounts, which in turn would 
depend on the convertible assets of customers. The 
Banking on the sch ° o1 represented by Mr. Dawes 
capital of the contend that the current money-de- 
mands arising out of the credit-ac- 
counts used by the bank to purchase commercial 
paper should be met by the bank itself out of its own 
capital; i.e., the second school referred to argue for 
banking on the capital-resources of the bank instead 
of banking on the convertible assets of the community, 
to which the bank has sold its credit to be used as 
current funds. 

Principles of Banking with Respect to 
Capitalization 

The reasoning of this second school is based on the 
assumption that the purpose of bank capitalization, 
as in all business enterprise, is to provide funds with 
which to procure permanent equipment. This 



BANK CAPITALIZATION AND ELASTICITY 69 

assumption cannot be denied ; it must be accepted as 
axiomatic . The financial process called capitalization 
Capitalization of is the creation of a permanent fund 
permanent needs for a permanent use. The reason for 
°' an s obtaining funds for permanent equip- 

ment by capitalization is to avoid the necessity of 
constantly refunding — a need which is a continuing 
one. This being generally accepted, the only ques- 
tion that remains is: What are the permanent needs 
— what is the equipment necessary to safe banking ? 
Their second premise is that the business of bank- 
ing is one of furnishing " current funds" to its cus- 
tomers in the form of non-interest-bearing credit. 
This must also be accepted. The customer obtains 
these credit-funds by selling to the bank his own 
interest-bearing note, or some other form of bankable 
asset. The earnings of a bank are derived from 
exchanging these non-interest-bearing credit obliga- 
tions, which are used in the community as current 
Needs determined funds, for good commercial paper 
by nature of purchased at a discount or with in- 
terest accruements* The amount 
of earnings depends in large measure on the amount 
of good commercial paper the bank is able to buy 
with its credit-accounts — i.e., profits depend on the 
amount of credit-accounts (so-called deposits) pur- 
lins form of statement is not entirely in accord with the more recent 
practice whereby the banks are paying interest on their own accounts 
(deposits). But in such event, the rate must necessarily be lower than 
that paid by the customers for loans. In any event the result is the same. 



70 THE BANK AND THE TREASURY 

chased by customers by means of their own interest- 
bearing obligations and bankable assets. 

The permanent need of a commercial banking 
institution is a need for money and for assets readily 
convertible into money; this equipment is necessary 
as a means of supporting outstanding credit-accounts 
sold to customers. And if a bank has in mind the 
principle of elasticity in providing accommodation to 
the community which it attempts to serve, the amount 
The amount of °^ capitalization of a bank should be 
capital needed by sufficient to support and protect its 
a credit-purchases of all good commer- 

cial paper offered by those who wish to use credit- 
accounts. The bank holding itself ready at all times 
to purchase all good paper offered by those who carry 
so-called " deposits" should have "capital-resources" 
large enough to meet all demands for money on the 
credit-accounts created and issued to customers in 
exchange for commercial paper, without calling or 
re-discounting its loans. Or, to state the conclusion 
of the second school categorically: Capitalization 
should be sufficient to meet every money-demand on 
the amount of banking (credit-account) business done. 

If there were no variations in the amount of credit 

used, then a money equipment large 
Fluctuations in , ■ ' j j 

credit-demand enough to meet money-demands on 

this constant volume of credit-issues, 
pending voluntary liquidation, would be the only 
equipment needed. But the fluctuations of de- 





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BANK CAPITALIZATION AND ELASTICITY 71 

mands for current bank-credit are continuous; the pro- 
portion of money-demands to credit outstanding is 
also variable. These fluctuations come from the 
shifting prosperity of customers; they come also from 
the fluctuating demands of a business community 
from season to season. 

It is found by experience, however, that the de- 
mand for current funds (i.e., the amount of good 
commercial paper and other bankable assets offered 
to the bank in exchange for accounts) varies with 
considerable regularity. The money-demand may 
likewise be closely approximated. In highly mer- 
cantile communities the experience of a bank may 
show a recurring ebb and flow of credit four times a 
year — the largest demands coming semi-annually; 
in certain agricultural communities there is a rise 

Ability to capital- and fal1 twice P er y ear ; in others, the 
ize fluctuating loans and accounts cumulate and are 

reduced by voluntary liquidation only 
once in twelve months. The amount of capital 
needed under such circumstances, unless the bank 
intends regularly to shift the burden by re-discount, 
is an amount that will provide a safe money-reserve 
for the support of the largest volume of credit-ac- 
counts (so-called deposits) carried during the year. 

No greater fallacy existed in banking circles than 
the one so often stated — that a certain percentage 
of "cash" to deposits is the only equipment necessary 
to sound banking. This form of reasoning has led 



72 THE BANK AND THE TREASURY 

to strange results. In time of minimum demand, 
the money-reserves are allowed to run low in propor- 
Equipment tion. By assuming that this is the 

needed to meet only form of equipment needed, the 
puc ua tons bank has no resources from which more 

money may be realized, when demands are larger, 
without calling loans or restricting credit accommo- 
dations. Again, in attempting to determine the 
amount of money-reserve needed, it may be found 
that in one institution less than ten per cent is actually 
used. The bank having such an experience recog- 
nizes that it is not good business to carry a money- 
reserve of twenty or thirty per cent. This would be 
as foolish as for a coke company to build twice or 
three times as many ovens as it may ever hope to use. 
The clause of the National Bank Act which allows 
the banks to " deposit" their surplus money-reserve 
is a contradiction in itself and a recognition of this 
folly. But those who are responsible for this law 
engaged in two other fallacies, viz.: (i) that the so- 
called " deposit" is not a sale of money; and (2) that 
the asset obtained on sale of surplus money is a 
readily convertible " in vested-reserve." 

The wide variations of demands for money from 
"Money-reserve" time to time on the accounts of cus- 
and "invested- tomers make two forms of equipment 
reserve advantageous, viz.: (1) a legal-tender 

" cash-reserve " of such amount as will protect the 
bank against all current demands, including de- 



BANK CAPITALIZATION AND ELASTICITY 73 

mands of customers for money and demands of 
banks on exchanges; (2) an "invested capital-re- 
serve" which will produce an investment income 
when money-demands are small, but which may 
readily be converted into "cash"* in time of need, 
without forcing the bank to sell its commercial paper 
or call in its loans. 

The Kind oj Capital Equipment Necessary to 

Elasticity 

As a basis for further discussion of the relation of 
capitalization to the problem of elasticity, the follow- 
ing illustration is given. A bank with a share-capi- 
tal of $100,000 and a surplus of $25,000 may provide 
equipment for itself, as follows: 

Capital-Resources 

Banking house $5,000 

Redemption equipment: 

1. Cash-reserves: 

(a) Exchange balance $10,000 

(b) Money-reserve 60,000 

2. Invested-reserve 50,000 120,000 

Total equipment $125,000 

Capital Liabilities 

Capital stock $100,000 

Surplus 25,000 

Total capitalization $125,000 

*" Cash" is here used to mean legal-tender "money" and "accounts" 
with banks for purposes of redeeming exchanges, but not to include 
"loans" to banks at interest even when these loans are in the form of 
open accounts not used for the redemption of credit obligations. See 
subsequent treatment of "loans to reserve agents," etc. 



74 THE BANK AND THE TREASURY 

With these capital-resources and with this redemp- 
tion equipment of $120,000 the bank may purchase 
commercial paper and other bankable assets with its 
own credit-accounts as follows: 

Commercial Assets 
Loans and discounts, etc.* $466,666.66 

Commercial Liabilities 
Accounts of customers (i.e., deposits) $466,666.66 

From the above it will be seen that the bank in 
question has used all its capital in the purchase of 
equipment, that is to say: (1) $5,000 was used to 
provide a banking-house, furnishings, etc.; (2) a 
redemption equipment made up of a " cash-reserve " 
of $70,000 and an " in vested-reserve'' of $50,000 — 
i.e., capital-resources amounting to $120,000 were set 
aside for the protection of the credit transactions of 
the bank with its customers. In the above showing, 
$466,666.66 of " demand-accounts" are represented 
as outstanding; these have been used to purchase 
$466,666.66 of commercial paper * It thus appears 
that there is a "cash-reserve" amounting to fifteen 
per cent of the outstanding customers' accounts 

*It is not to be presumed that all accounts are created by the purchase 
of commercial paper. Much of the accounts are created by "deposits" 
(sales) of money, checks, and drafts, etc., but generally speaking the 
money, checks, and drafts deposited with (sold to) a bank will be used as 
set-offs against withdrawals, and the customers' accounts (deposits) will 
very nearly equal commercial paper held — i.e., loans and discounts. 
If the capital funds are kept separate and apart and the investments to 
be used as capital-equipment clearly distinguished and unimpaired, the 
"commercial assets" account and the "commercial liabilities" account 
will be very nearly equal. 



BANK CAPITALIZATION AND ELASTICITY 75 

(so-called " deposits") and that there is an added 
" in vested-reserve" of ten and seven-tenths per cent. 
Let us assume that this bank is located in a Western 
cattle country, and that the demands of customers 
for current funds fluctuate from $300,000 to $700,000 
during a year — also that a fifteen per cent money- 
reserve (a much larger money-reserve than is usually 
necessary) is found adequate at all times to satisfy 

current demands for money. During 
Capital adjust- ,1 ,.-, •> • ,-, , 

ments to demands the cattle shipping season the loans 

would, by voluntary liquidation, be 
reduced to $300,000; at such times only $45,000 in 
" cash-reserve " would be needed for safety. With 
the capitalization above represented, therefore, $65,- 
000 of the redemption equipment of the bank might 
be invested in some kind of readily convertible asset 
that would produce an income. Gradually, as the 
season progressed, the ranchers would bring in new 
cattle-notes to exchange with the bank for accounts. 
Safety would then demand an increase in the " cash- 
reserve"; this (the cash-reserve) might then be re- 
couped out of the " in vested-reserve " — i.e., out of 
the unencumbered capital-resources. When the 
commercial-paper-assets and current-accounts-pay- 
able rise to $700,000 the " money-reserve " (by sale 
or by hypothecation of " in vested-reserves") would 
be increased to $105,000 (fifteen per cent of out- 
standing accounts-payable) and still leave a liberal 
margin of " in vested-reserve." If the banks were to 



76 THE BANK AND THE TREASURY 

operate under some such measure as that proposed 
by Senator Knox, December 4, 1907 (S. 1239), or 
by Senator Aldrich, January 7, 1908 (S. 3023), the 
invested-reserve might be used as collateral to 
note issues, or, under the Payne- Aldrich law of 1903, 
the invested-reserve might be deposited as collateral 
to government deposits. Thus without in any man- 
ner increasing the market demand for money as a 
means of increasing the banker's reserves, the credit 
accommodations of the bank might be increased two 
and one-half times its available capital. The capital- 
resources of the bank in the form of invested- 
reserves" might be hypothecated with a ten per cent 
margin in collaterals without sale of the invested 
capital-reserves (or they might be sold) in any mar- 

Elasticity a result ^ where money might be had on 
of capital adjust- favorable terms, and the amount of 
the money so purchased might be 
transferred as an exchange balance to the Western 
bank. With such an equipment, operating under 
laws of the character referred to, the national 
banks alone would enjoy an elasticity of credit fully 
supported by capitalization equal to $2,500,000,000. 
Add to this the ability to safely expand which would 
come through other banks operating under favor- 
able State laws, and the elasticity adaptable to 
business of legitimate character would exceed any 
emergency demand that has to this time been felt. 



Chapter VII 

THE PUBLIC CONTROL OF COMMERCIAL BANKS 

One of the principal functions of government, so 
far as it undertakes to control banks, is to protect 
the customer against an impairment of banking 
capital; to this end periodical reports are required. 
Question is raised as to the efficiency of present 
methods of control and as to the degree of pro- 
tection given to purchasers of credit-accounts of 
banks. Preliminary to this inquiry three questions 
must be answered before any proper appreciation 
may be had of the possibilities of public control as 
a means of protecting the public against an " un- 
sound" and "inelastic" circulating medium, viz., 
(i) what are the powers of control given by the Na- 
tional Bank Act? (2) Under the Act, what are the 
purposes for which control is to be exercised? and 
(3) in the exercise of powers granted, what devices or 
means may be employed by the Comptroller to reach 
these ends ? These preliminary questions having been 
disposed of we then will be fairly abreast of our topic. 

Powers of Control Given by the National Bank Act 

The first of these inquiries may be answered by 
direct appeal to the language of the Act. Section 

[77] 



78 THE BANK AND THE TREASURY 

No. 87 of the National Banking Law (Section 521 1, 
R. S.) contains this specific mandatory declaration: 
" Every association [i.e.. National bank] shall make 
to the Comptroller of the Currency not less than five 
reports during the year, according to the form which 
may be prescribed by him." This general provision 
is supplemented by grants of specific power to the 
Comptroller, which enable him to call for other re- 
ports as often as he may desire, and to obtain such 
information as he "in his own judgment" thinks 
necessary "to a full and complete knowledge" of 
financial condition; a bank failing or refusing to 
comply with such request is liable to a penalty of 
$100 per day (Section 5213, R. S.). It would appear, 
therefore, that the Comptroller is not lacking in 
authority to obtain any and all information which 
may be necessary to administrative supervision. A 
further reading of the National Bank Act quite as 
concisely forces the conclusion that the Comptroller 
has all the power necessary to a complete control over 
National banks and their operations, as to all subjects 
which are properly within the range of official dis- 
cretion ; this power extends even to the taking posses- 
sion of the bank itself and winding up its affairs for 
failure to comply with his demands. 

The Purposes for which Control is to be Exercised 

This brings us to consider the second question 
raised, viz.: the subjects of official discretion under 



PUBLIC CONTROL OF COMMERCIAL BANKS 79 

the Act, or the purposes for which official control is to 
be exercised. It has repeatedly been affirmed that 
the prime purpose of the National Bank Act was to 
create a better market for Government bonds when 
the National credit needed support. In the midst of 
civil strife when the financial resources of the nation 
were strained almost to the point of bankruptcy, it 
was conceived that a very large part of the capital 
employed in commercial banking enterprise in the 
United States might be utilized to support the Gov- 
ernment. The plan proposed was an old one — one 
in which the banks (being induced to use their capital 
to purchase Government bonds receiving the high 
rate of interest then paid on National loans) would 
be permitted to use " notes" with which to carry on 
their banking business. By this device it was 
thought that the financial strength of the banks 
might be brought to the support of the Government, 
i.e., that the State banks might be induced to bring 
over their capital into a new National system where 
it might be utilized in the manner indicated. 

To make such a scheme acceptable, however, two 
conditions must be met: The first result of such a 
plan of support to the bond market would be a large 
Conditions neces- increase in the money circulation of 
sary to the adop- the country and this note would not 
Hon of the Bank be recdved unless it be made as sound 

(i.e., as valuable) as the money then in current use 
— the greenback. But this is not the only condition 



80 THE BANK AND THE TREASURY 

that the Government must reckon with. In the 
experience of the past, business had suffered quite as 
much from unsound bank-credit in the form of 
customers' accounts (or deposits) as it had from an 
unsound currency. National reaction against " wild- 
cat' ' banking had but recently forced the several 
State systems over to a basis of capitalization and 
official inspection to protect the people against 
wholesale fraud and bankruptcy. If these State 
institutions were to be brought into a National bank- 
ing system — if the Government was to utilize their 
capital-resources to fund its own necessities — the 
new National system must carry with it all the pro- 
visions for safety and for the protection of the public 
against the speculative devices of the unscrupulous 
that three decades of the legislative reaction had 
evolved. Wild-cat banking was banking on "com- 
mercial assets" without adequate capitalization. 
From 1837 to the time of the Civil War the whole 
trend in banking ideals and in banking legislation 
was toward the strengthening of banking equipment. 
It had been found from bitter experience that a bank 
which was not properly capitalized (and which, 
therefore, did not have capital-resources sufficient 
to support its credit transactions) was as dangerous 
to those coming into business contact with it as was 
a mine or a factory whose construction was faulty 
and whose machinery was overcrowded. To the 
public, the poorly equipped bank was much more 



PUBLIC CONTROL OF COMMERCIAL BANKS 81 

dangerous than the mine or factory by reason of the 

fact that, in case of collapse, a much larger number 

of people were constantly within the danger line. 

After two years of agitation and amendment and 

compromise an acceptable law was enacted. 

Under the Act the note was to be secured by a 

collateral deposit of the bonds purchased; and those 

Guarantees for holding the credit-accounts of the 
11 sound currency" i -, . i , . -, i 

and "sound bank were }° be P rotected h Y P ro " 

banking" visions which required what was 

thought to be adequate capitalization before busi- 
ness should be begun, and the exercise of official 
supervision to prevent " impairment of capital'' 
during the period that business should continue. 
It was for the purpose of enforcing these two pro- 
visions of safety and security that the Bureau of the 
Currency was created and a Comptroller was ap- 
pointed. 

Means by Which Control May Be Exercised and the 
Ends of the Act Reached 

The functions of the Comptroller have a direct 
relation to the conditions above described. The 
first, or, as it was then viewed, the prime purpose for 

which public control was to be ex- 
The two purposes . -, , ., •, 

of control erased was to guarantee the sound- 

ness of the new National currency. 
This is clearly expressed in the first clause of the 
Bank Act which recites: " There shall be in the 



82 THE BANK AND THE TREASURY 

Department of the Treasury a bureau charged with 
the execution of all the laws passed by Congress 
relating to the issue and regulation of a National cur- 
rency secured by United States bonds; the chief 
officer of which bureau shall be called the Comp- 
troller of the Currency. ..." The second purpose 
of the appointment of a Comptroller is set out in 
various subsequent portions of the Bank Act, viz.: 
to insure adequate capitalization — (i) adequate 
capitalization as a condition precedent to commenc- 
ing business, and (2) adequate capitalization at all 
times to secure customers against loss through 
"impairment." 

That the "National Currency" which was to be 
issued through the agency of the banks might be as 
sound as the standard money (i.e., that all forms of 
money-issues might have a common valuation) pro- 
vision was made that the bonds purchased by the 
banks might be hypothecated with the Treasurer as 
collateral security for final payment and redemption 
of notes outstanding. According to the provisions of 
the Act the Government was made a trustee for the 

benefit of note-holders. For each 
Control to insure ^ £ , , , , , , 

sound currency $°oo of notes turned over to the bank 

by the Government for issue, the 
Treasurer was to hold a non-interest-bearing account 
with the bank secured by a $1,000 bond. The obli- 
gation of the bank to the Government was for the 
repayment of $900 in bank-notes or legal-tender 

* At present the bank may obtain par on bank notes under this Act. 



PUBLIC CONTROL OF COMMERCIAL BANKS 83 

money at its own option. The Government as trus- 
tee was the legal owner of the bond. The benefi- 
ciaries were (i) the note-holders to the amount of 
notes held, and (2) the bank for the amount of the 
current income on the bond and for its equity of 
redemption. This plan of National currency having 
been adopted, when a bank issued a note the cus- 
tomer took it, as before observed, not on the credit of 
the bank, but as a beneficiary in the trust-security 
held by the Government. The note-holder never 
inquired as to the credit of the bank through which 
the note was issued, but relied entirely on his claim 
against the security held in trust by the Treasurer. 
Since both bond and greenback were Government 
credit the National currency secured by Government 
bonds was taken by the public to be as good as a 
greenback. Later, when both greenbacks and bonds 
were redeemed in gold, this National currency came 
to be considered as good as gold. 

As a means of control (to secure the soundness of 

the circulation or National currency so issued), 

therefore, the function of the newly created bureau 

was to see that the trust account of 

?h?s™£Ztim 6 ° f the bank with the Treasurer was kept 
amply secured, and that the bonds 
held as collateral security were sufficient for this 
purpose. But all the data was at hand for deter- 
mining this fact, and the bonds themselves being in 
custody, the services of the Comptroller in his capac- 



84 THE BANK AND THE TREASURY 

ity as guardian of the currency became merely nomi- 
nal and perfunctory. Moreover, for this service no 
report was necessary to control. 

Not so with the second function exercised by the 
bureau — the protection of those who held open 
accounts (or deposits) of the bank; its importance 
was correspondingly increased, but not in its bearing 
Importance of on original capitalization. As at the 
control to protect beginning, the method of ascertaining 
depositors whether the bank had the requisite 

capital-resources to commence banking operations 
has remained one of inspection and not one of finan- 
cial report. The Comptroller must know that at 
least fifty per cent of the amount of the authorized 
capital-stock is actually in hand in money, and that 
the balance of the stock subscription is good, so that 
it may be realized in ten per cent monthly instal- 
ments. 

The most difficult duty which the Comptroller has 
to perform, and the one of increasing importance to 
the financial world, is that which pertains to the 
security of the public against the " impairment of 
Capital as a sup- capital-resources " during the period 
port to "de- that the bank continues in operation. 
posits" Knowledge as to this feature of the 

work must come largely from the reports made by 
the banks themselves, as the number of examiners 
is grossly inadequate to report more than a check on 
some of the main items of account. It is from 



PUBLIC CONTROL OF COMMERCIAL BANKS 85 

this duty that the present inquiry takes its chief 
bearing. 

Protection of the Public Against Impairment of 

Capital 

To state more specifically some of the questions 
that the Comptroller must have in mind in asking 
for reports with respect to capitalization: Section 
5202, R. S., provides that "No association at any time 
shall be indebted, or in any way liable, to an amount 
exceeding the amount of its capital-stock [capital- 
resources] at such time actually paid in, and remain- 
ing undiminished by loss or otherwise, except on 
accounts of the nature following: (i) Notes of circu- 
lation; (2) Moneys deposited with or collected by the 
association; (3) Bills of exchange or drafts drawn 
against money actually on deposit to the credit of 
the association, or due thereto; (4) Liabilities to the 
stockholders of the association for dividends and 
reserve profits." Section 5203, R. S., specifies that 
Specific assign- "No association shall, either directly 
ments 0} duty to or indirectly, pledge or hypothecate 
omp ro er an y Q £ -^ no ^ es £ c ir CU l a tion for the 

purpose of procuring money to be paid in on its 
capital-stock, or to be used in its banking operations 
or otherwise; nor shall any association use its circu- 
lation notes or any part thereof in any manner or 
form to create or increase its capital-stock [capital- 
resources].' ' Section No. 5204 recites that "No 



86 THE BANK AND THE TREASURY 

association or any member thereof shall, during the 
period it shall continue its banking operation, with- 
draw or permit to be withdrawn, either in the form 
of dividends or otherwise, any portion of its capital 
[capital-resources]." Again, in Section No. 5205, 
R. S., the law requires that "Every association which 
shall have failed to pay up its capital-stock, as re- 
quired by law, and every association whose capital- 
stock [capital-resources] shall have become impaired 
by loss or otherwise, shall, within three months after 
receiving notice thereof from the Comptroller of the 
Currency, pay the deficiency in capital-stock [capital- 
resources] by assessment upon the stockholders pro 
rata for the amount of capital-stock [capital-liability] 
held by each." 

All of these, and other assignments of duty with 
respect to the protection of customers against im- 
pairment of capital, make necessary official inquiry 
into the relation of capital-resources to capital-lia- 
bilities — they require a special in- 
Need for an . 4*1. v 1 

analytical report <l uir y as to the capital-resources at 

hand. For the purpose of determin- 
ing whether or not the capital equipment of the bank 
has become impaired through "loss" on account of 
banking operations or " otherwise," a keenly ana- 
lytical report is necessary. To properly execute this 
function of control it is necessary to distinguish the 
capital-resources and liabilities from the other assets 
and obligations of business. 



PUBLIC CONTROL OF COMMERCIAL BANKS 87 

The Present Value of the Report to the Comptroller 
as a Means of Control 

In taking up the "form" of report made by the 
banks to the Comptroller, attention will be confined 
to the question of determining whether or not the 
No attempt made capital-resources have become im- 
to distinguish paired. An examination of financial 
capital-resources statementSj as at p reS ent made, will 

disclose the fact that no attempt is made to distin- 
guish " capital' '-resources and liabilities from the 
assets and obligations " current" to the business. 

An Analysis of Banking Resources 

For the purpose of determining the financial con- 
dition of a going concern, it has become an established 
principle of analysis that capital-resources are all 
those properties and assets which are intended for 
permanent or continuous use in the business. Two 
Equipment to be principles of administration are well 
provided by capi- settled: (i) to prosecute an enter- 
tal investment prise success f u n y it is necessary to 

provide the management with equipment adapted to 
its purposes; and (2) whatever property, equipment 
and stock or working assets are permanently or con- 
stantly needed, should be provided out of capital 
investment. As before suggested, this is the purpose 
for which capital is needed. The proper equipment 



88 THE BANK AND THE TREASURY 

of a business is necessary to success. As a matter 
both of financial advantage and of financial safety, 
this equipment should be provided out of capital. 
To attempt to provide permanent equipment out of 
temporary loans, or floating debt, is to hold the enter- 
prise in constant jeopardy. This is as true of a bank 
as it is of a railroad or of a mine, and this is the under- 
lying thought of the law. 

Again, to restate a currently accepted definition, 
the current assets of an enterprise are those which are 
acquired, not for equipment or continuous use in the 
business, but those which are acquired in its current 
transactions — i.e., in the course of current operation 
for profit. The purpose of current assets is realiza- 
tion, or conversion. Current liabilities are those in- 
curred in current transactions. It is to fund the 
temporary needs — to meet the current expenses — ■ 
to provide funds to carry these current assets and 
current transactions — that a floating debt is con- 
The " commercial tracted. If the principles of financial 
assets' 1 obtained analysis commonly employed in ac- 
oncurrentaccount counting are appHed to the assets and 

liabilities of National banks, conclusion may be 
reached as to whether or not the capital-resources 
have been impaired; also, whether or not the 
permanent equipment is adequate to support its 
operations with safety to those who may be in 
business contact with the institutions under ex- 
amination. 



PUBLIC CONTROL OF COMMERCIAL BANKS 89 

What Are the Capital-Resources of National Banks 

The reports, as at present made to the Comptroller, 
are not based on such a system of analysis, and, 
therefore, any attempt at rearrangement to this end 
must in a measure be unreliable. But taking the 
various items of resource exhibited as a basis for 
present discussion, a fair approximation may be 
reached: (i) " Banking-house and fixtures" are un- 
questionably capital-resources. (2) " Real-estate," 
in contemplation of law and from every point of 
business reasoning, should be charged against capital. 

(3) The bank invests its capital in 
Analysis of capi- , 1 , , . -, 

tal outlay bonds to secure circulation, and re- 

ceives on the collaterals deposited 
notes which may be used in the business — the "mar- 
gin" of capital invested in these collaterals should 
be considered a capital charge; the same is true of 
the " margins" invested in the collaterals deposited 
to secure Government deposits. (4) The " money- 
reserve" is essentially a capital-reserve; it is the 
principal redemption equipment necessary to support 
the current credit-accounts (deposits) outstanding — 
the resource necessary to meet the floating debt of a 
business, whose chief transactions are the purchase 
of current assets by use of its own current credit- 
accounts. There can be no doubt that the " money- 
reserve" held by a bank should be a direct charge 
against capitalization, and is made so by legal enact- 



90 THE BANK AND THE TREASURY 

ment — the only question with reference to this class 
of items pertains to the interpretation to be given as 
to what properly constitutes " money-reserves.' ' 
(5) The accounts which it is necessary for a bank to 
maintain to provide for its out-of-town " exchanges" 
are likewise assets permanently needed and in con- 
tinuous use; it should therefore be counted as a part 
of the necessary redemption equipment. (6) Finally, 
the unencumbered securities and other direct invest- 
ments of capital owned and held by a bank as a 
means of strengthening its cash-reserve should be 
regarded a part of its redemption equipment and 
a charge against capital-resource. These must be 
so considered for the reason that the direct applica- 
tion of capital to the purchase of " securities, " or for 
that matter even to the purchase of commercial paper, 
is not banking. There can be one purpose only for 
making such purchases, viz.: to keep the capital 
which is needed to support credit transactions in- 
vested in income-producing assets when not needed 
in the form of "cash." "Securities" must be con- 
sidered either as redemption equipment held in 
reserve or as an investment which is a charge on 
capital and therefore a deduction from capitalization 
for banking. The same is true of all other direct 
investments of capital. A bank which engages in 
buying and selling "securities," in "underwriting 
flotation," or in other business not in the nature of 
banking, needs to have a larger capital than an insti- 



PUBLIC CONTROL OF COMMERCIAL BANKS 91 

tution which does not so engage itself. Whether the 
capital investment be in banking equipment, or in 
other assets and business ventures, the amount of 
funds thus engaged by the banks should be set up as 
capital-resources or charges against the capital pro- 
vided for doing business, the protection of which is 
the chief end of control. 

These several classes of assets being in the nature 
of charges against capital, the duty of the Comptroller 
(under the National Bank Act) requires : (i) that an 
examination of the assets be made to ascertain what 
may fairly be counted as capital outlay for banking 
Examination to equipment, and that this be compared 
ascertain capital with the amount of capital provided 
impairment for uge of the institution under exam- 
ination ; and (2) that an examination of current assets 
be made to ascertain whether there have been any 
losses suffered in the prosecution of the business, since 
all "bad loans," etc., must be charged against capital. 

The accounts exhibiting capital put into the busi- 
ness are found on the liability side of the balance- 

Accounts exhibit- sneet - The capital provided for use 
ing capital pro- in the business is represented in three 
controlling accounts, viz.: "Capital- 
stock," "surplus," and "undivided profits." Of 
these, the first two items are to be a permanent 
reserve or liability in the business, and the third 
must remain in it so long as there is any question as 
to the impairment of capital-resources. 



92 THE BANK AND THE TREASURY 

Before any comparison may be made for the pur- 
pose of determining what character of investments 
have been made of capital put into the business, the 
statement of assets reported by the banks must be 
Provisions made assumed to be based on a proper 
for appraisement valuation, or a critical examination 
of assets must be had. For this purpose the 

Comptroller may supplement the report made by the 
bank itself with the report of his examiners in whose 
field the bank lies, or may detail a special examiner 
if the case seems to warrant such an assignment. In 
any case, however, a distinction must be made be- 
tween the current-accounts and the capital-accounts. 

Classification o) Balance-Sheet to Show 
Financial Condition 

Intelligent judgment as to the character of equip- 
ment provided by a bank by capital investment 
requires a classification of resources. The exercise 
of official discretion with reference to the integrity of 
capital-resources, which proceeds from the examina- 
tion of financial reports, makes a classified balance- 

Consolidated sheet a necessity. To the end of 
statement for establishing a basis for the further dis- 
State oj Iowa cussion of « the fi nanc i a i re p rt as a 

means of control," and at the same time of showing 
some of the difficulties which stand in the way of the 
exercise of effective control under the present form 
of report, an analysis of the consolidated statement 



PUBLIC CONTROL OF COMMERCIAL BANKS 93 

of all the National banks of the State of Iowa for 
September 9, 1903, is here exhibited. The classifi- 
cation submitted is not offered as a model in the 
arrangement of items. Neither is the assignment of 
inadequacy of the present set form intended to reflect 
on Comptrollers past or present. The form now 
used is, in effect, that which has been employed by 
officers of banks for a century; it has been engaged 
by comptrolling officers of Government since public 
examination first began. To suggest that a change 
might be made to advantage is not therefore to be 
considered as offered in the spirit of reflection on 
official conduct, more than a proposed amendment 
of law would imply legislative incapacity. 

Not engaging any spirit of personal criticism, and 
holding in mind the difficulty of doing more than to 
suggest that a classified balance-sheet is essential to a 
consideration of the topic assigned, the statement 
of capital-accounts opposite page 94 is modestly 
offered as a tentative arrangement. 

Attempting to show the amount of capital put into 
the business, and to account for its investment, in the 
exhibit below it is assumed that the valuation of 
assets represented in the reports of the Comptroller 
is conservatively made, and that there are no "bad 
loans" to be written off. But even with this assump- 
tion, and for this purpose, the form of report made 
by the banks to the Comptroller renders many of the 
items doubtful: (1) In the statement of "premium on 



94 THE BANK AND THE TREASURY 

bonds' ' as one element in the computation of the 
amount of capital locked up in " margins' ' there is 
Doubtful items no wa Y of distinguishing this from 
due to form of premium on " bonds" on hand"; (2) 
statement ^ the t c cash items » j t ig of f requent 

occurrence for banks to include expense vouchers 
which are to be held till the end of the month; in 
so far as these were included, the statement of the 
amount of " cash-reserve" is too large. (3) The 
amount stated as " balance kept with banks for ex- 
change" must be roughly approximated, as no spe- 
cific inquiry is made in the present form submitted 
by the Comptroller to determine this fact. The 
amount of Clearing-House exchanges held are $141,- 
000; assuming that the amount of exchanges out- 
standing against the banks under consideration aver- 
ages $17 5, 000, and further that the average exchanges 
against " outside" banks are not greater than those 
against clearing-house banks, and this would seem 
conservative; assuming further that on an average 
it requires three days for outside exchanges to be 
presented and paid, the average balance needed to 
be kept for the redemption of exchanges would be 
$525,000. Again assuming that the " outside" 
money demands for exchange were not more than 
one-tenth of the local demands for money, and taking 
this as a basis for estimate, the exchange account 
necessary would be $548,799; this is taken as the 
amount of the account with "reserve agents" which 



STATEMENT OF UNAVAILABLE CAPITAL INVESTMENT AND OF BANKING EQUIPMENT FOR ALL NATIONAL BANKS 
OF THE STATE (IOWA), SEPTEMBER 9, 1903, COMPARED WITH CAPITAL FUNDS PROVIDED IN THE BUSINESS * 

Capital Funds in Business 

I. — Capital-stock S14.88r.550 

II. — Surplus 3.533,641 

III. — Undivided profits 2,085,923 

Total capital funds provided in the business $20,501,114 

Amount of equipment used, not capitalized 11465,537 



Capital Investments and Equipment 

I. Unavailable capital investments: 

(1) Banking-house, etc 

(2) Real-estate 

(3) "Margins." 
(a) Amount invested in collaterals: 

(1) U. S. bonds for circulation .... $8,742 010 

(2) U. S. bonds for deposit 2.391 100 

(3) Other securities for deposit 

(4) Premium on bonds (?) 313,006 

(5) Five percent fund in Treasury. 424,880 

Total investment $11,870,996 



(b) Less cash received: 

(1) Circulation $8,690,245 

(2) U. S. deposits 2,324,773 

Total avails $11,015,018 

Capital invested in " Margins " 



855,978 



Total unavailable capital investments S3, 397,053 

II. Redemption equipment: 
(o) Monev-reserves: 

(1) Cash items (?) $475,136 

(2) Bills of other banks 481,461 

* (3) Frac. currency 36,515 

(4) . Specie 2,988,269 

(5) L. T. notes 1,498,104 

(6) U. S. certificates of deposit 

(7) Due from U. S. Treasury 8,512 

$5,487,997 
(b) Balances kept with banks for ex- 
changes (?) 548,799 



Total "cash-reserves" $6,036,796 

(.c) Unencumbered securities: 



(1) U. S. bonds 

(2) Stocks, etc. 



$18,400 
3,147-380 



Total $3,165,780 

^2) Less encumbrances. 

(1) Bonds borrowed $53,210 

(2) Bills payable (?) 624,500 

(3) Other liabilities 79,816 

Total $757,526 

Amount invested in unencumbered securities. . $2,408,254 

(d) Other "res 
(1) Loans 



investments: 



Total redemption equipment $18,569,598 

Total amount investments and equipment $21 ,966,65 1 




ployed in the business $2 1 ,966,651 



PUBLIC CONTROL OF COMMERCIAL BANKS 95 

is carried for redemption of outside exchanges. The 
remainder of the "reserve agent" account is con- 
sidered as "loans" to other banks at interest and is 
included in th%{' in vested-reserve." These amounts 
are arbitrarily set up, but as they are both in the 
nature of capital charges the arbitrary division is not 
important. (4) Under the head of "encumbrances" 
on "securities owned" it is assumed that the "bills 
payable" and "other liabilities" stand as encum- 
brances on stocks, bonds, etc. This is true to the 
extent only that these liabilities are based on stocks 
and bonds hypothecated as collaterals, and in so far 
as this is not true the account would be varied by 
an exact return such as might be obtained from the 
bank. (5) The amount exhibited as "loans to re- 
serve agents" is stated on the assumption that the 
purpose of such investment is to have a quickly 
convertible asset by means of which cash may be 
obtained when the money-reserve runs low — a bank 
making a statement to the Comptroller under a form 
calling for these specific items of capital-resource 
might set up some other form of asset as a "direct 
capital investment." In each and all of the items 
above mentioned there are elements of doubt — 
elements which require questions to be raised, but 
each of which might be made certain by a different 
form of inquiry submitted to the banks by the Comp- 
troller in seeking for a classified statement of capital 
investments. 



96 THE BANK AND THE TREASURY 

But assuming for the purposes of present discus- 
sion that the above analysis of capital investment 
were true to the facts, let us see what use might be 
made of such form of report. In the first place we 
may seek to eliminate those investments which are 
not in the nature of redemption or banking equip- 
ment. The building in which the bank is housed 
need not be owned by the bank itself. The banking 
business is a credit business; primarily it consists of 
the exchange of bank-credit for commercial-credit 
at a profit. Investment in a building does not 
strengthen the concern in its current-credit relations. 
Many of the largest banking institutions do not own 
a building. The prime purpose of capitalization 
being to provide equipment with which to supply 

funds to the community in the form 
Unnecessary e , -, •,., r •, 1 

capital outlays of demand-credit, any use of capital 

to purchase a building must be con- 
sidered as an extraneous investment not available 
for the support of the credit of a going concern. 
" Real-estate'' belongs to the same class of invest- 
ments. This has been so often said that it has be- 
come axiomatic in commercial banking circles. The 
"margin" invested in the securities hypothecated 
with the Government are also not available to the 
business as a going concern. All of the above 
classes of assets are important as assets for final 
liquidation on "winding up," but to a "going con- 
cern" they are purely voluntary and ornamental and 



PUBLIC CONTROL OF COMMERCIAL BANKS 97 

bear much the same relation to the business of bank- 
ing that the gilded dome on the Congressional Li- 
brary does to the value of its literary stores within. 
Whether or not in contemplation of law this amounts 
to an impairment of capital, the fact remains that 
$3,297,053 of capital invested in this way has weak- 
ened the banks of Iowa as "going concerns" to that 
extent. 

Another class of considerations attaches to the 
remaining classes of capital investments — those re- 
sources used to support the banking transactions 
themselves by redemption of credit obligations on 
demand. Assuming that the banks had made re- 
turn of redemption equipment as above exhibited, 
the Comptroller as an agent of the Government 
Outlays for re- should know whether this equipment 
demption equip- is adapted to the use for which it is 
intended. The unencumbered secu- 
rities, for example, being intended for an in vested- 
reserve to strengthen the cash-reserve held to support 
demand-accounts (deposits outstanding), the ques- 
tion pertinent to this use is: Are these securities im- 
mediately convertible by sale or hypothecation with- 
out loss of principal ? If, again, any of these are held 
as the result of underwriting, this fact would suggest 
that a portion of the bank's capital was being em- 
ployed in business other than banking and there 
would be an impairment in use if not in valuation. 
Such part of the bank's capital as is used for under- 



98 THE BANK AND THE TREASURY 

writing should be placed among the unavailable 
assets. Further than the specific inquiries made as 
to the character of redemption equipment, compari- 
son may be made of total capital outlay with capital 
liabilities, to ascertain whether the equipment had 
been provided by means of capital or on floating 
debt. By some such classification increased facility 
would be given to many other official inquiries 
directed toward the protection of the people against 
the impairment of the capital-resources needed by 
a going banking concern. 



Chapter VIII 

AN ELEMENT OF CONTROL NOT ADEQUATELY PRO- 
VIDED BY THE NATIONAL BANK ACT 

While the National Bank Act is very specific as 
to powers of control directed against the " impair- 
ment of capital' ' there is another element of banking 
strength or weakness quite as important that has 
been neglected; viz., the protection of the customer 
against overburdening the equipment used. Judg- 
ment as to safety must be made not alone with re- 
spect to the absolute strength of material used in 
construction and equipment, but this having been 
Need for deter- determined it then must be compared 
mining the with the weight or strain that it is to 

support. To be more concrete, every 
facility is given to such inquiry as the Comptroller 
may desire to make to protect the capital put into 
the business against deterioration, but almost no 
provision is made for official inquiry as to whether 
the credit burden imposed by the bank officers on 
this equipment in the prosecution of the business is 
greater than it can safely bear. 

[99] 



100 THE BANK AND THE TREASURY 

There is no provision made for correlation of capi- 
tal equipment with the credit liabilities incurred in 
the course of its business. These must be met on 
demand, and safety requires that they should be met 
by capitalization. This is an essential to sound 
banking as contemplated in the National Bank Act. 
Banking activities are represented in its current 
assets acquired and the current liabilities incurred 
in banking operation. To concretely exhibit this 
class of financial results, reference will again be 
made to the summary for the State of Iowa above 
used in the statement of capital accounts. 

Current Assets (Less $000,00) — Acquired in the Course of 
Banking Operations 

I. — Due from Banks and Bankers: 

(1) Due from National Banks $2,698,877 

(2) Due from State Banks 1,058,726 

(3) Clearing-House exchanges 141,352 

$3,898,955 

II. — Commercial assets : 

(1) Loans and discount $62,159,426 

(2) Overdrafts 1,121,025 

Total $63,280,451 

Less notes rediscounted . . 105,267 

Net commercial assets 63,175,184 

III. — Miscellaneous: 

(1) Revenue stamps 1 ,020 

Total current assets $67>°75> I 59 



A POINT NOT COVERED BY THE BANK ACT 101 

Accounts Representing Banking Operations 

Current Liabilities (Less $000,00) — Incurred in Banking 

Operations 

I. — Due to Banks and Bankers: 

(1) Due to National Banks.. $2,362,481 

(2) Due to State Banks 4,257,426 

(3) Due to Trust Companies, 

etc 3,258,966 

$9,878,873 
Less amount incurred for 

equipment purposes . . 1,465,537 

8,413,336 

II. — Commercial Credit Accounts: 

(1) Individual deposits $58,606,777 

(2) Deposits of U. S. disburs- 

ing officers 42,586 

5 8 > 6 49>3 6 3 

III. — Miscellaneous : 

(1) Dividends unpaid 12,460 

Total current liabilities $67,075,159 

From the two summaries exhibited, — the one of 
" capital accounts" (p. 94), and the other of " banking 
transactions" (above), — it appears that by means of a 
capital investment of $20,501,114 a banking business 
of $67,075,159 was carried on. With these results in 
mind let us determine, in so far as we may, what 
Means of deter- strain was brought on capital equip- 
mining equip- ment. In the first place, on what 
ment strength part of ^ equipment do€S the bank „ 

ing strain come? As before observed, it is at once 
apparent that no part of the credit strain falls 
on the first three classes of equipment enumer- 



102 THE BANK AND THE TREASURY 

ated, viz.: (i) "Banking-house and fixtures." (2) 
"Real-estate" and (3) "Margins." From the point 
of view of the demands of commercial banking these 
are purely a gratuitous use of capital. Ownership 
of a house and furnishing is unnecessary — this para- 
phernalia may be leased and the rent charged to 
current expenses, and when a building is owned it is 
in the nature of a real-estate investment; "real- 
estate" owned is an encumbrance on banking capital 
and not banking equipment; the "margins" invested 
in bonds used as collaterals for notes and deposits are 
incidental to the system devised by the Government 
to strengthen its own credit, and as such are not 
banking equipment — they are a further encum- 
brance on banking capital. 

The equipment necessary to banking transactions 
is the "cash-reserves" or "such invested capital- 
reserves as may readily be converted into cash" and 
which may be used to meet demands on outstanding 
credit-accounts without curtailing commercial ac- 
commodation. As a means of carrying on a business 
which consists in the exchange of bank "credit-ac- 
counts" for "income-producing assets in the nature 
of commercial-credit," the bank must establish and 
Three classes of maintain a reputation for meeting its 

redemption credit-accounts on demand. The 

equipment Qnly way ^ ^ may be done w j th 

safety to its customers is by having capital-resources 
in the form of "cash" when demands are made. 



A POINT NOT COVERED BY THE BANK ACT 103 

The real test of banking strength, therefore, is to be 
found in the redemption equipment: (i) in the 
" cash-reserve' ' — cash in hand and exchange-bal- 
ances — and (2) in " in vested-reserve " — " unencum- 
bered securities " and "other capital investments " 
readily convertible into cash. Again assuming the 
valuation of these capital-assets to be conservative, 
the strength of banking equipment of the State of 
Iowa by this method of analysis, at the time stated, 
was $17,104,061. 

But a comparison of strength of equipment with 
the credit strain upon it must be arrived at by bring- 
ing the two results together. The total demand 
obligations for the payment of money were in round 
numbers $68,500,000. That is, the redemption 
equipment (after deducting reserve loans uncapital- 
ized) being $17,100,000, and the total amount of 
demand-credit to be supported $68,500,000, the 

inverted pyramid would be $68,500,- 
The test of credit & ^ 

tension 000 — $17,100,000. But in getting 

at the amount of the strain that will 

fall on the capital-resources this gross amount must 

be reduced. Eliminating by set-off the current 

institutional assets and liabilities, the relation of 

credit outstanding to capital-assets would be $62,- 

500,000 — $17,100,000. In other words, $17,100,- 

000 invested in banking or redemption equipment 

has permitted the banks of Iowa to purchase about 

$62,500,000 of interest-bearing commercial assets by 



104 THE BANK AND THE TREASURY 

means of about $62,500,000 of their own credit- 
accounts supported by this equipment. Through 
banking operation, the corporations have a gross 
income about four times as large as they would have 
by direct investment of their capital in commercial 
paper, and have furnished to the community credit- 
funds which do the work of money of equal amount. 

The purpose of control is to make such a business 
safe, and the differential of safety must be drawn 
from experience, leaving an adequate margin of pro- 
tection to the public against contraction of the circu- 
Need for control lating medium as well as to protect 
as a means of customers against immediate loss from 
sa ' e ? non-payment. The need for a better 

correlation of capitalization with equipment and 
banking operations carried on may appear the more 
vividly by comparison of the several classes of banks 
reported. {See next page.) 

Assuming that for the purpose of accounting for 
capital investment in redemption equipment the 
cash on hand is to be a first charge against capital 
(this not being an income-producing asset and of 
first importance in the support of credit), in so far as 
may be determined from published bank returns, 
the foregoing summary shows the disposition of cap- 
ital invested in the banking business in the various 
classes of banks represented. From this it would 
appear that while in a single agricultural State like 
Iowa the banks by their own capitalization have 



A POINT NOT COVERED BY THE BANK ACT 105 



Exhibit of Capital Investments by Classes of National Banks, 

September 9, 1903 

(Stated in Millions of Dollars.) 



Classes or Items 



Unavailable Capital : 

Investments (Banking-Houses, real- 
estate and margins) 

Redemption Equipment: 
Cash-Reserve: 

(1) Money 

(2) Exchange account 

Invested Reserve: 

(1) Securities 

(2) Other reserve investments 

Total Capitalization* 



All 

National 
Banks 



$1.86 



605 
61 



446 
12 



>i,3io 



i2U 

Ifi QJ 

c " 

P3 



$IOI 



183 
18 



237 
159 



$698 



• - o 

if. -* 

<u C 



$42 



147 
14 

116 
2 



{21 



gU3 
tn^ — 

«-* 



— n) 

C ^ if. 

v .- - 
UUTi 



$43 



248 



$291 



u « 

o ™ 



$38 



177 



5215 



* The amount stated as capitalization includes capital stock, surplus, and undivided 
profits. 

provided the funds to procure a large part of the 
resources used as redemption equipment to support 
their outstanding credit, taking all of the banks of the 
Inadequacy of United States this is not true; they 
capital invest- have provided capital enough for 
"cash-reserves" and for " securities" 
actually held, but they have provided almost no 
capital for direct investment in "loans to reserve 
agents." The banks in reserve cities (of the 
second class) are in about the same relative con- 
dition as those of the country at large, in so far as 



106 THE BANK AND THE TREASURY 

these items are concerned ; absolutely they are in a 
much weaker position on account of the importance 
of their "reserve loans" not capitalized. The banks 
of the central reserve cities (the " cities of the first 
class"), however, have not sufficient capital to pro- 
vide themselves with the current " cash-reserves" 
used in the business, and which are required of them 
by statute, to say nothing of securities owned; the 
amount of "cash" which such banks are able to 
provide through capitalization is only 24.2 per cent of 
their net banking liabilities. Assuming that all 
of their capital were retained in the form of cash, 
there would not be enough to provide the amount 
actually on hand by $27,000,000 — this part of the 
redemption equipment, together with the funds neces- 
sary to provide all other forms of equipment carried, 
had been borrowed. Assuming that the equipment 
actually carried is needed, then the banks of reserve 
cities have obtained $292,000,000 of their equipment 
on floating debt. 

If we take the judgment of bankers as to what 
equipment is necessary to the safe conduct of their 
business, an interesting result will be obtained. For 
this purpose it may be assumed that a banker will 
keep no more "cash" on hand than safety to his 
business requires ; if he does he is violating good busi- 
ness judgment. The same may be said of " exchange 
accounts" and of investments made in low income- 
producing assets from which "cash" may be realized 



A POINT NOT COVERED BY THE BANK ACT 107 

by quick returns to support credit-accounts. Assum- 
ing further that the principle is a sound one, that such 

Capital weakness assets as are permanently employed, 
admitted by or such as are continuously needed 

7 7 ' 

oanners - n ^ e business, should be procured 

by direct investment of capital (i.e., that a busi- 
ness concern, especially a bank, should not obtain 
its equipment on a "floating debt"), then the in- 
adequacy of capital increases as we proceed from 
periphery of the National banking system towards 
this centre. To exhibit this in tabular form, the 
result of failure of the Law to require such control 
as will prevent the overtaxing of capital-resources, 
and such as will insure that our commercial banks 
do business on their own capital, would appear 
something as follows: (See next page.) 

In this question is raised as to several classes of 
items. Without specific inquiry as to the amount 
a bank carries for "exchange account " this must be 
approximated. The approximation here given, how- 
ever, is a deduction from "loans to reserve agents" 
(another account which is carried as an invested- 
reserve for the purpose of supporting the cash-re- 
serve) and therefore one which should be capitalized. 
As to the securities held, in so far as they are not held 
as reserve equipment, they are not a banking re- 
source, and like "real-estate" are in the nature of an 
encumbrance on banking capital. Such assets must 
be either for support to bank-credit or for direct 



108 



THE BANK AND THE TREASURY 



Statement of Equipment Actually Used by the Several Classes Compared 

with Capital Provided 

(Stated in Millions of Dollars) 



Classes of Capital Items 



Unavailable Capital Outlays : 
" Banking-house," " real -estate," 
and " margins " 

Redemption Equipment Used : 

Cash-reserves 

Exchange account 

Securities 

Loans to reserve agents 

Total equipment carried 

Actual capitalization provided 

Equipment carried on floating debt.. 
Percentage of floating debt 







8 


<u tn 


i> v>^~. 




>*r* 


S 


.5 oj 


C4.« $ 


cd 

o 

1-4 


OoQ 


C/3 

'3 


£ a 

S 

in u 


Central 
erve Cit 
first cla 






P 


P4 3 




$3-4 


$IOI 


$186 


$42 


$43 


5-5 


183 


606 


147 


275 


•5 


18 


61 


is 


27 


2.4 


237 


446 


116 


94 


IO.I 


221 


365 


145 

$465 


— 


$21.9 


$760 


$1,664 


$439 


$20.5 


$698 


$1,310 


$321 


$291 


1.4 


62 


354 


144 


148 


7% 


9% 


27% 


44% 


5i% 



$38 

208 

21 

79 



$346 

$215 

131 
60% 



investment. In either case the bank should not buy 
bonds on credit. Taking the charges against capital 

Amount of in- as tne y stan d and the redemption 
crease in capital equipment actually used, we find that 
needed for the United states, in the judgment 

of bankers themselves as reflected in practice, the 
banks should have provided $354,000,000 more of 
capital to support their business. That is, to prop- 
erly support $4,363,000,000 of credit used in the 
course of bank operations to purchase $4,363,000,000 
of income-producing assets, the equipment which 
was actually used should have been provided by the 



A POINT NOT COVERED BY THE BANK ACT 109 

proprietors of the business. Such a provision would 
require an increase of twenty-seven per cent in total 
bank capitalization. But further inquiry would 
show that all but about five per cent of this gross 
amount of capital to make up the shortage would be 
required from the reserve city banks, and that nearly 
one-half of the entire increase is needed in the City 
of New York. Such would be the inevitable con- 
clusion if we accept the business judgment of bankers 
themselves as to the needs for banking equipment. 

The Inadequacy of the Bank Act 

Again the position before taken is affirmed, — that 
this is not proposed as a true method of analysis to 
get at the relation of intensity of credit strain to 
equipment used. Attention is directed only to the 
fact that such an element should be taken into ac- 
count in reports, the purpose of which is to furnish 
the data for official control as a means of protecting 
the country against "unsound" banking and an 
" inelastic" currency. Further, it is suggested that 
no provision is made in the present form of report 
for ascertaining these data; and only one provision 
of law is made to protect the public against any 
The only protec- overtaxing of capital equipment. This 
Hon against in- one provision referred to is the clause 
pa ion which imposes a minimum limit in 

money-reserve to be kept. This limitation imposed 
does, in fact, operate to prevent some of the least 



110 THE BANK AND THE TREASURY 

provident bankers from bringing their house down 
on the heads of customers, and precipitating a panic 
in the business community. Nevertheless, the pro- 
vision is entirely inadequate to prevent an overtaxing 
of equipment. To illustrate one of the methods 
used for complying with the law, and at the same 
time for carrying a load that keeps the institution on 
the verge of credit collapse : — From the published 
reports it appears that a number of banks have indi- 
vidual deposits outstanding amounting to from ten 
to twelve times their capitalization. Some of these 
banks continuously carry a cash fund larger than 
their capital-stock, surplus and undivided profits. 
They also carry large holdings of stocks, bonds, and 
other securities. Where did they obtain this money ? 
Undoubtedly they borrowed it. Where did they get 
their other redemption equipment? Undoubtedly 
by means of a floating debt. In several instances, 
only about one-third of the redemption equipment 
constantly used by these banks is provided by means 
of capitalization ; the balance is obtained on demand 
loans. Imagine another enterprise being financed 
in this manner. With methods of capitalization ad- 
mittedly unsafe if applied to another business, is it 
to be presumed that our system of commercial credit 
will be "sound" and capable of rendering the highest 
service to the business community so long as these 
methods are permitted? 
This is not to be considered as imputing fault to a 



A POINT NOT COVERED BY THE BANK ACT 111 

banker for doing business in this way. If a banker 
finds that he may obtain capital from others with 
which to do business, and that, when a sudden de- 
The individual mand comes for payment, he can force 
banker primarily his commercial customers to find the 
no a fault means necessary to replace the tempo- 

rary foundations withdrawn, if by such methods the 
banker maybe able to keep his own house from falling 
on the heads of managers and stockholders, he maybe 
exonerated on the principle that he has availed him- 
self of a business advantage which has brought a large 
return in profits. The method may be excused in the 
case of the individual bank. But what is the result 
of this character of banking to the commercial com- 
munity? And what of a general law and adminis- 
tration which permits such an individual practice? 
As a National system this is another form of " wild- 
cat" banking, and it is in this very practice that we 
find much of the trouble that heretofore has been 
ascribed to inelasticity of the currency. The prime 
fault is in a law which permits bank capitalization 
inadequate to maintain the volume of bank-credit 
offered by banks to the community as a circulating 
medium with which to do business and of which 
customers have availed themselves. This form of 
bank-credit being suddenly withdrawn to protect the 
bank from its own weakness, the community and the 
individual customers of the bank are left in a crippled 
condition, to struggle against financial loss. 



112 THE BANK AND THE TREASURY 

One of the purposes of control should be to secure 
a better coordination between the volume of credit- 
Additional ele- accounts sold and capital equipment 
ments of control provided as a means of support ; to 
needed ^ end the Nat j ona j Ban ^ Act needs 

revision. But having been revised so as to give the 
Comptroller power to exercise supervision, to prevent 
the overstraining, as well as the " impairment" of 
capital, the present power to compel reports is suffi- 
cient to make the supervision effective. One of the 
principal purposes of the Bank Act is to guard integ- 
rity of our financial system and to protect the public 
against loss on account of inadequate bank capital- 
ization. To effect the full purpose of the Act, to 
vouchsafe a system of control which will secure 
" sound banking" as well as "sound currency," there 
should be added to the present powers which are 
intended to protect against an impairment of capital, 
inquisitory powers directed against an overloading 
of equipment. As a means of executing this author- 
ity, classified schedules should be devised which will 
furnish the information necessary to intelligent offi- 
cial discretion, and classified financial statements of 
results should be published, that the public may the 
more intelligently deal with the banks. 



Chapter IX 

CHARACTER OF ASSETS THAT MAY BE SAFELY HELD 
BY BANKS AS " INVESTED-RESERVES " 

To restate conclusions: If we define capital-re- 
sources as those assets which represent capital outlay 
(assets purchased by means of capital-funds or which 
are to be charged against capital-account), then it is 
in financial statements of capital-resources that the 
capital outlays of a business are to be accounted for. 
In a banking business, there are two general classes 
of capital-assets, viz., (i) those in the nature of physi- 
cal equipment, and investments not 
A restatement of » -,-, , , , -, . , 

conclusions available to support banking trans- 

actions, and (2) the banking or re- 
demption equipment — resources which have been 
provided or which are being held to support current 
banking operations. Investments in assets of the 
first class referred to (not being a necessary part of 
the business) may be treated simply as an encum- 
brance on capital; outlays for assets of the second 
class (or what we may term " redemption equip- 
ment ") are essential to the business of banking. 
Again, under present business conditions the " re- 
demption equipment " of a bank is necessarily made 

[113] 



114 THE BANK AND THE TREASURY 

up of two general classes of resources, viz., (i) the 
"cash," which is made up of the "money-reserve'* 
on hand retained as a means of protecting the bank 
against default on current or ordinary local money- 
demands on credit-accounts, and exchange-balances 
kept with correspondents to meet foreign demands 
for money on credit-accounts, and (2) those assets 
which are held as an "in vested-reserve" as a means 
of obtaining "cash" to meet extraordinary demands 
on credit-accounts outstanding. The purpose of a 
legal requirement for adequate capital equipment 
is to insure the "soundness" of credit-accounts of 
banks sold to customers for their use, without 
forcing a sudden contraction of the circulating me- 
dium and a consequent credit collapse. The reason 
for carrying a part of the equipment as "in vested- 
reserves" is to decrease the capital cost to the bank. 
From such a view of the capital-resources of commer- 
cial banks, and such a statement of the uses of the 
two kinds of redemption equipment (viz., "cash" 
and "invested-reserves" or capital investments read- 
ily convertible into cash), inquiry may be made as to 
the character of assets which a bank may hold as an 
"invested-reserve." What character of "invested 
capital reserves" will contribute best to the purposes 
(public and private) for which they are held ? 

Generally speaking, there are three kinds of in- 
vestments in which a bank may employ capital-re- 
sources not needed in the form of "cash," but which 



a^^^^.^r, >> 



ASSETS TO BE HELD AS "RESERVES 77 115 

are necessary to the equipment of the bank for the 
support of outstanding accounts. These may be 
described as follows: (i) Loans to other commercial 
institutions; (2) stocks, bonds, and other securities; 

Classes 0/ re- and (3) the commercial paper pur- 
serve capital in- chased from those who are not de- 
vestments pos itors. That is to say, the "loans 

to other commercial institutions, 77 the "stocks, bonds, 
and other securities,' 7 and the "commercial paper 77 
which are chargeable to "capital-account 77 are 
assets which have not been purchased by means of 
credit-accounts of the bank. And in making finan- 
cial statements of "capital-resources 77 and "capital- 
liabilities' 7 the bank should clearly indicate what 
paper or assets are to be considered as chargeable 
to capital-account. These three classes of invest- 
ments will be separately considered. 

Demand Loans to Other Banks as Reserve- 
Capital Investments 

It is the common practice among banks to loan a 
portion of their capital-resources to other banks. 
The reason for this is not a public one, but to de- 
crease the capital cost to the bank. Such loans are 
set up in published summaries under two heads ; viz., 
(1) amounts "due from reserve agents," and (2) 
amounts "due from other banks." Regarding the 
practice from the point of view of public interest, 
these loan accounts have been considered as assets 



116 THE BANK AND THE TREASURY 

immediately available for procuring cash to meet 
money-demands. So general and so plausible is 
Loans called" de- tnis assumption, that it was made a 
psits with re- part of the National Bank Act, under 
serve agen s which both classes of items are ac- 
counted as cash. The general acceptance of this 
conclusion rests on fallacy. The conclusion has been 
supported by reasoning from analogy. In mercan- 
tile business a bank-account is properly considered 
"cash"; the primary purpose of a merchant's bank- 
account is to provide the means necessary for meeting 
current commercial demands. 

While, however, this is true of the merchant, it 
does not necessarily follow as to the banker. It may 
not be assumed that a credit-account of one bank 
against another bank should be considered as cash- 
capital equipment. For the purposes of the bank, 
this assumption goes afield at four points: (i) Since 
the business of the bank is one of purchasing "com- 
Accountswith mercial assets" by exchanging its 
other banks as credit-accounts for the use of its cus- 
equipment tomers ag « cash? » the bank is in a 

different funding relation than the merchant accom- 
modated; while the merchant may settle his credit 
balances by bank-credit, the bank must make pro- 
vision for the settlement of credit balances in money. 
(2) The checking out or transfer of the accounts of 
one bank to customers of other banks outside of the 
immediate locality must be settled through the estab- 



ASSETS TO BE HELD AS "RESERVES" 117 

lishment of an exchange base in other cities ; whether 
this exchange base is in the form of money or of 
rights to "draw," a considerable portion of the fund 
cannot be made available for the payment of local 
demands and for the settlement of local exchanges. 
The exchange account is capital tied up for the sup- 
port of exchange transactions and cannot be con- 
verted into money without crippling the bank's 
operations. (3) To permit one bank to sell its 
"money-reserves" to another bank for a credit or 
"reserve-account," and then to permit the selling 
bank to treat the "account" as cash to any greater 
extent than it may be necessary for the second bank 
to retain the money in its vaults to meet the exchange 
demands of the first bank, is to permit both banks 
to extend their credit-accounts on the same capital 
support and thus to weaken the equipment of both, 
since a demand of one bank on another bank for 
settlement is a demand for money. (4) By account- 
ing "amounts due from other banks" as "cash," 
without distinction as to the exchange purpose of 
their creation, and through the regular practice of 
loaning money-surplus to reserve agents, the reserve 
city banks have been encouraged to give support to 
underwriting syndicates and to margin speculation 
at the same time that the "depositing" bank is ex- 
tending its credit-accounts with customers. A very 
large portion of accounts (deposits) held by customers 
against reserve city banks are credit-contracts created 



118 THE BANK AND THE TREASURY 

in exchange for call-loans, which, under ordinary 
circumstances, may be quickly realized on by the 
reserve bank; these, however, are not immediately 
convertible in time of panic without undermining the 
whole credit structure ; at such times a general process 
of forcing liquidation constricts the circulating me- 
dium to an extent that proves ruinous to business. 
Whenever an unusual demand for payment of loans 
is made by country banks on reserve agents, such 
demands force the reserve banks to restrict their own 
accommodations, and thus contract the circulating 
medium. 

The underlying fallacy of the reasoning which is 
back of that part of the Bank Act, and back of the 
theories which give sanction to the practice itself, 
may be seen when we analyze the character of the 
investment. In so far as bank A does not need the 
reserve fund or account kept with the reserve city 

The fallacy en- bank B > as an exchange base {i.e., for 
gaged by the a current purpose) it is investing its 
capital in the same kind of a credit 
obligation as is the call-loan customer of bank B. 
Bank A is degrading its investment judgment to the 
same level as an ordinary speculator, and receiving 
therefor a rate of interest little if any higher than 
might be received on U. S. Government bonds. 
Bank A's investment (account with B) is one de- 
signed to be held as " available" for the purpose of 
obtaining cash to meet an extraordinary demand. 



ASSETS TO BE HELD AS "RESERVES 119 

But extraordinary demand is usually associated with 
market conditions which make "call-loans" the most 
delicate of all commercial assets. Yet for this pur- 
pose bank A holds an open account of bank B, which 
in turn has treated the money borrowed from bank 
A as a "cash-reserve" to support accounts of specu- 
lators and to meet demands made on its own ac- 
counts. This is the common practice in New York 
City. By reference to Chart VIII, opposite page 
152, it may be seen that the " deposits" of country 
banks furnish nearly all the money held by New 
York City banks as a means of supporting about 
$1,000,000,000 of demand accounts of customers. 

It is not a new experience in the financial world for 
reserve city banks to temporarily suspend money 
payment to protect themselves against the banker's 
demand for money on payment of drafts and ex- 
change-balances. The vicious tendency of such a 
practice of borrowing a money-reserve from other 
banks and of lending the credit of borrowing banks to 
speculative enterprise has been a subject of com- 
ment by every Comptroller from the foundation of the 
National banking system down to and including Mr. 
Unavailability of Knox; and the undesirability of in- 

reserve accounts vesting capital of commercial banks in 

in time of strain 1 . u . >> 

' loans to "reserve-agents" was again 

pointed out by Mr. Dawes in 1898. While under 

ordinary circumstances they may be convertible, 

" loans to other banks" cannot be considered the 



120 THE BANK AND THE TREASURY 

best kind of reserve-capital investment. There may 
be many reasons why the banks of reserve cities 
would be in favor of such a practice, but from the 
point of view of elasticity and general welfare the 
practice should be publicly and legally condemned. 

"Securities" as Reserve-Capital Investments 

As to State banks, private banks and trust com- 
panies, it is shown that a large proportion of the 
securities owned are in forms not easily marketable 
when occasion requires. The National banks have 
no published statistics of the proportion of the several 
classes of stocks, securities, etc., held, but the reports 
About one-halj of do show that about one-half of their 
bank capital so capital and surplus is invested in 
stocks, bonds, and other securities; it 
is also shown that these assets yielded little support to 
the credit-accounts in time of emergency or extraor- 
dinary money-demand. Such a showing and such 
experiences, however, do not warrant the conclusion 
that stocks, bonds, and other securities which may at 
once be converted into cash to meet money-demands 
on accounts outstanding may not be effectively used 
as " reserve-capital investments. " 

It may be stated as a demonstrable conclusion 
that such investments are not always convertible 
into money by sale without loss to the bank. But 
while a favorable market may not always be found 
in which even stocks and bonds which are considered 



ASSETS TO BE HELD AS "RESERVES" 121 

as "gilt edge" may be realized on without loss to 

invested principal, in time of monetary disturbance, 

securities of this class may usually be 
Convertibility by v ■% * » ,1 

sale J ' realized on by sale as soon as the 

emergency is passed ; in time of finan- 
cial depression it very often happens that investments 
of the first rank rise to a higher point than during a 
period of credit inflation for the reason that " gilt- 
edge" securities are then relatively scarce and are 
the only ones to which investment capital is attracted. 
Elasticity, however, depends on immediate con- 
vertibility. Although, in an emergency, "gilt-edge" 
securities may not be converted by sale without in- 
vestment loss, money may always be obtained on 
them by a process of hypothecation. The large finan- 
cial companies, such as savings banks, trust com- 
panies, insurance companies, etc., which have few 
demand obligations to meet and which at the same 

time have large funds available for 
Convertibility by . , ,-, 

hypothecation investment, may come to the rescue 

of the commercial banks through 
loans, in case the banks do not care to realize on their 
securities by sale at an unfavorable market rate. In 
obtaining cash by loans or sales of their own col- 
laterally secured credit obligations the banks are able 
to realize on reserve-capital investments of this kind, 
by hypothecating their securities with investment 
institutions. In such event the only part of the in- 
vested capital not available for present needs is the 



122 THE BANK AND THE TREASURY 

amount represented in the " margins." It is by this 
process that the Government assists national banks 
to obtain money on such investments without loss. 

Special facility is given for such a disposition under 
our present Law. Two methods are provided where- 
by the United States Treasury may permit the imme- 
diate conversion of " gilt-edge" securities. In the 
first place, " United States bonds" may be hypothe- 
cated for " issues"; in the second place (under the 

Special facilities more recent rulin g of the Secretary), 
for hypothe- when the Government has a Treasury 
surplus, "gilt-edge" securities may 
be hypothecated for gold, i.e., "Government de- 
posits," which immediately give to the banks receiv- 
ing them an exchange-balance against the Treasury. 
In order to avail themselves of these aids, however, 
the Government requires that the banks have unen- 
cumbered "gilt-edge" securities to hypothecate, and 
this is what the banks in many instances have failed 
to do. 

Again, "gilt-edge" securities which are unencum- 
bered may at any time be hypothecated in the general 
loan market. For the purpose of procuring tempo- 
rary loans, the loan capital of the 
Support of the , . . -, ■> , -, 

loan market entire commercial world may be 

availed of. There are no institutional 
or National limits to a good investment security. It 
is to assist in the process of international investment 
as a means of relieving National financial distress 



U Tt ^ r<T - 1T >., T , J> 



ASSETS TO BE HELD AS "RESERVES 123 

that the "rate" is so often raised by the Bank of 
England. The loan market is not local or National. 
In the past, the inability of banks, which have in- 
vested capital in securities, to obtain money by sale 
has been due to one of two practices : Either the bank 
has departed from the banking business and has be- 
come a dealer in securities for the purpose of making 
its profits on buying and selling instead of looking 
primarily to interest payments on commercial accom- 
modation, or its officers have been guilty of adminis- 
trative indiscretion in the purchase of securities 
which are intended to give support to their own credit- 
accounts. Their inability to obtain funds by hypoth- 
ecation has been due either to the weakness of the 
Practices which security itself (as frequently happens 
have prevented when the bank engages in underwrit- 
ing and other speculative ventures), 
or to the fact that they have already hypothecated 
their " gilt-edge" holdings. An instance of failure 
from the first cause — i.e., on account of the char- 
acter of the weakness of its investments — is found 
in a recent collapse of a large institution which had 
sought without success to obtain a million dollar loan 
on the security of eight million dollars of securities 
held. Instances of inability of banks to obtain 
money for pressing need on account of "gilt-edge" 
securities having already been hypothecated are 
many; and, under the present Law and practice, the 
Government holds out a permanent inducement for 



124 THE BANK AND THE TREASURY 

banks to weaken their equipment through the hy- 
pothecation of their best investment assets. The in- 
ducement referred to is the offer on the part of the 
Government to exchange " notes" and " deposits* ' 
for secured accounts of the bank, without interest. 
The result is, that the banks, as a means of increasing 
their profits during times of ordinary money-demand, 
or so-called periods of prosperity, encumber their 
best invested assets by hypothecation, and in time of 
money stringency and extraordinary demand they 
are unable to support their credit-accounts (deposits) 
without forcing " loans." 

Commercial Paper as Reserve-Capital Investments 

Commercial paper purchased or held on capital 
account must be clearly distinguished from com- 
mercial paper purchased by means of credit-accounts, 
i.e., by exchange for deposits. Commercial paper 
which is obtained for direct investment of a bank's 
How capital is capital is usually obtained through its 
invested in com- own loan brokers, or through a com- 
merctal paper merc i a i paper house or note-broker. 
Their own loan brokers are represented in the "loan 
crowd" who are seeking to invest the money surplus 
for the bank. The note-broker would obtain a mar- 
ket for the paper of his customers. The business of 
the note-broker is to find banking houses or other 
loaners of capital who are looking for this kind of 
investment. 



ASSETS TO BE HELD AS "RESERVES 77 125 

Ordinarily a bank will not buy paper of one who 
is not a customer if it has enough paper offered by 
its customers to fully employ its capital. The reason 
for this is that a customer's note may be purchased 
in exchange for a credit-account of the bank (a de- 
posit). The bank with its own capital used as a 

"redemption reserve," therefore, may 
A " reserve" cap- -, i ,. ., , r 

ital investment purchase several times the amount of 

commercial paper from its customers 
that it can by direct investment of capital in the notes 
of those who are not customers ; as a result a propor- 
tionately larger return in profit will be received from 
the exchange with customers. The bank will loan 
through its broker, or will offer to purchase paper 
through a note-broker, only as a means of investing 
a "capital 77 surplus, and this may be used as an 
"in vested-reserve" without contracting or forcing 
loans to customers. 

Demands for payment made on these notes do not 
reflect on the bank itself through forcing the customer 
{i.e., the holder of its own accounts) to convert. 
Neither do payments at maturity so seriously disturb 
the commercial world as do sudden demands on 
"call" or short- time paper. The paper purchased 

through note-brokers usually runs for 
How the practice . , , ,, , n ., . -, 

impairs elasticity slxt T OT mnet y da y s > the definite period 

for which funds are needed by the one 
selling his paper), and payment will be made by vol- 
untary liquidation. Such demands, however, may 



126 THE BANK AND THE TREASURY 

quite as seriously interfere with the principle of 
elasticity of the bank-account as a circulating me- 
dium, since a narrowing market for these loans, or 
the refusal to renew when renewals are asked, may 
require liquidation of the accounts where they are 
kept, and this liquidation may result in violent con- 
traction. 

Under such circumstances, commercial paper must 
be regarded as a very high class of investment for 
surplus " capital" so far as the interests of the indi- 
vidual bank are concerned. Such investments are 
also in the line of true banking for profits from interest 
accrued in commercial accommodations. But never- 
theless investments of capital-funds in commercial 
paper to be held as a "surplus-reserve" may be con- 
sidered of doubtful character for the community at 

large. Commercial paper is used by 
Doubtful charac- .-i -i • . i , • 

ter of -practice ^ e business man to obtain current 

funds. Capital-investment in com- 
mercial paper may at any time put the bank in the 
position of forcing the customers of other banks to 
liquidate, and thereby may cut off banking accom- 
modation when accommodation is most needed. 
Besides, such a practice tends to relieve the banks of 
a locality from responsibility for capitalizing to meet 
the funding needs of its local constituency. 



Chapter X 

PUBLIC DANGERS IN THE PRESENT EQUIPMENT 
OF NATIONAL BANKS 

Although the liabilities of failed banks are re- 
ported as $216,000,000, the ultimate loss to customers 
has been $33,000,000. This, reduced to a percentage 
of loss on total liabilities of all National banks per 
year, would amount to about one-twentieth of one 
per cent, or an average risk of less than one two- 
hundredth of one per cent for the usual period of 
credit accommodation. The average direct loss, 
however, is not the primary consideration, more 
than is the average direct loss on the circulation 

of counterfeit coins, or the average 
Losses from bank -,. , , , . , , 

failure direct loss on depreciated currency. 

To the individual the loss is in 

the sudden disappearance of his entire account 

so far as its use as current funds is concerned. 

Without notice or opportunity to protect himself, he 

is deprived of his "cash." To him the immediate 

loss is as great as if he were the victim of a robbery; 

his indirect loss is greater, owing to the difficulty of 

again providing himself with current funds at a time 

when the credit of the whole community is strained 

[127] 



128 THE BANK AND THE TREASURY 

by the sudden shock and the concurrent cutting off 
of funds from all the customers of the failing institu- 
tion. This suggests, also, an incidental loss to the 
whole trading community, the extent of which cannot 
be measured or estimated. 

The suggestion here made is not intended as an 
arraignment of the National banking system so far 
as the solvency of its banks is concerned. The fact 
is that the individual bank has managed to protect 
itself against insolvency and that the direct losses to 
" depositors" have not been proportionately larger 
than to those of any other of the great banking sys- 
tems of the world. It is not to this aspect of the situa- 
tion that pleas for increased " elasticity" are directed. 

Arguments for elasticity have refer- 
Direct -financial , ,, -, ,. ,. ,, 

loss not the issue ence to the P ubllc question — the in- 
direct losses due to inability of the 
banks of the system to adjust their credit accommo- 
dations to current demands. The plea is not for 
increased security to the stockholders of the bank as 
a means of protecting them against insolvency, nor 
for the guarantee of the accounts of banks. In so far 
as such proposals are made they are purely incidental. 
The whole question of elasticity is a public one, 
having to do with the protection of the circulating 
medium against sudden contraction as a means of 
preventing loss to the individual bank and to the 
individual customer. It is to this end that a correla- 
tion is advocated between the capital support pro- 



DANGERS IN PRESENT EQUIPMENT 129 

vided for credit-accounts and the amount of credit- 
accounts to be supported. 

Capital Equipment and Credit Strain on the System 

That the National banking system may be under- 
stood with respect to capitalization, the resources and 
liabilities of all the National banks of the United 
States are exhibited in classified balance sheet form 
opposite page 130. In this an attempt is made to 
re-arrange the various items reported by the banks to 
the Comptroller in such a way as to show (1) the 
character of properties purchased by capital outlay 
which are unavailable for the support of banking 
transactions; (2) the classes of resources which are 
to be considered in the nature of redemption equip- 
ment, setting opposite these two classes of items 
the capital provided by the stock sales, surplus, and 
The character 0} undivided profits, plus the amount 
equipment illus- obtained by floating debt ; and, (3) 
the accounts representing banking 
operations and the relation of the redemption equip- 
ment to current demand liabilities. Owing to the 
indefiniteness and uncertainty of the data contained 
in the Comptroller's report for this purpose, these 
statements must be taken subject to the same quali- 
fications and questions raised on pages 94 and 95. 
But until a form of report is prescribed for the banks 
which will require specific declarations in classified 
form, the data given must remain the best obtainable. 



ISO THE BANK AND THE TREASURY 

Assuming this to represent the National banking 
situation on September 9, 1903 (and it cannot be far 
afield, for the reason that the items with respect to 
which question may be raised would not materially 
alter conclusions as to the results by classes), and 
assuming further, as does the National Bank Act 
itself, that an amount due from a reserve agent is to 
be considered a part of the "in vested-reserve" and 
therefore a capital charge, it would appear: (1) that 
$186,904,932.68 of the capital of banks was invested 
in properties and rights that were not available 
for current credit-redemptions (viz., in " banking- 
houses," " real-estate" and "margins"), and that the 
banks could have done just as much business as 
going banking concerns if they had not had these 
resources; these (though available for final liqui- 
dation) were unavailable investments and operated 
as a reduction of banking capital. (2) That of the 
two kinds of redemption equipment (assuming, as in 
Chapter VIII, that the foreign exchanges were only 
one- tenth of the local exchanges, and that $60,583,- 
675.38 would be adequate provision for these) 
$669,157,468.20 was in the form of "cash-reserves," 
and $811,543,333.22 was in the form of "invested- 
reserves" — the total redemption equipment being 
equal to $1,480,700,801.42. (3) That the total capi- 
tal provided by the proprietors, including stock, sur- 
plus, and undivided profits, after deducting outlays 
for the unavailable investments, was only $1,123,189,- 



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DANGERS IN PRESENT EQUIPMENT 131 

175.24, there being a difference between the redemp- 
tion equipment carried and the capital provided 
amounting to $357,511,626.18; this amount was bor- 
Redemption rowed from other institutions and 
equipment — how amounted to a demand-credit capital 
obtained liability or floating debt incurred in 

the purchase of redemption equipment. To reach 
such conclusions, it is to be observed, no assumption 
has been employed that is not based on the plain 
provisions of the Bank Act itself — viz., that the 
" amounts due from reserve agents" is to be con- 
sidered a part of the "reserve-funds" and therefore 
a capital charge. The amount of this demand-credit 
liability (or floating debt) must be subtracted from 
the available redemption equipment before the net 
amount of capital support to banking operations may 
be obtained. This net redemption equipment, 
therefore, amounted to $1,123,189,175.24. 

To measure the credit tension, or the strain which 
is brought on the equipment provided, the current 
credit-liabilities must be brought into comparison 
with the net redemption equipment. This relation 

would be represented by the fraction 4 '^ ^ — 4?559- — 

1,123,189,174.24 

or if reduced to percentage the capital support would 
appear as 25.7 per cent of the banking operations 
supported. Still another result would be obtained 
by setting off the institutional assets against institu- 
tional liabilities. Assuming that this might be done 



132 THE BANK AND THE TREASURY 

without impairing the banking power, the net bank- 
ing operation would amount to$3, 493, 363,570. 62, and 
Credit strain on tne relation of equipment would be 
redemption equip- raised to 27.9 per cent. This would 
be the measure of strain on the as- 
sumption that all parts of the redemption equip- 
ment were equally available for the support of credit. 
Of this equipment, however, $811,543,333.22, or 
72.2 per cent, is in the form of investments, and 27.8 
per cent in money-reserves. Without a special ex- 
amination of these investments no measure may be 
taken of their strength. Experience shows that the 
amount of invested-reserves actually available as 
equipment to meet the credit strain in time of need 
falls far below the amount and proportion above 
indicated. With this statement in view as to the 
method of arriving at the conclusion here reached 
some more general observations may be made. 

A Historical View 

From 1869 to 1893 the " money-reserves" in Na- 
tional banks were equal to about 50 per cent of the 
share capital. During the same period the com- 
bined amounts of money-reserves plus the unencum- 
bered securities ("United States bonds," "stocks, 
securities, etc.") were equal to about 50 per cent of 
the share capital plus the surplus. Investments in 
the nature of loans to other banks made up a large 
part of the balance of capital-resources; under ordi- 



DANGERS IN PRESENT EQUIPMENT 133 

nary circumstances these last mentioned investments 

(loans to other banks) are available resources for the 

support of credit-accounts, but as a 
Banking equip- r c , ,1 i i 

ment before 1893 form of equipment they have always 

shown weakness at the very time when 
strength is required. In many instances, however, 
the loans to other banks have not accounted for the 
entire balance ; at such times as this discrepancy has 
appeared, it is evident that the banks have used a 
portion of their capital for direct purchase of "com- 
mercial assets" instead of procuring them by ex- 
change of credit-accounts. From inquiry as to prac- 
tice of individual banks it is found that many of 
them have been guilty of investing a portion of their 
capital in loans to customers, relying specifically on 
their " commercial assets" to support their " credit- 
accounts." Such a practice is prima facie evidence 
of an extension of credit which may at any time cause 
the banks suddenly to reduce the credit-funds in the 
community to protect themselves from loss. To the 
public the result is the same as if no capital whatever 
had been invested in the banking business. 

Since 1893 the showing has been quite a different 
one; increasing proportions of capital-funds have 
been used to purchase securities. Had these invest- 
ments been readily convertible into cash when money 
was needed, the banks would have been in a much 
stronger position to-day than they were in before 
1893. The fact is, however, as hereinafter shown, 



134 THE BANK AND THE TREASURY 

that owing to the large interest of the banks in "call 
loans" secured by collaterals, these investments, 
Character of cap- stocks, securities, etc., owned have 
ital investments not been immediately convertible by 
since i 93 sa ^. man y £ t nem are no t even con _ 

vertible by hypothecation in time of extraordinary 
money-demand. Among these may be placed secu- 
rities which have been underwritten, for the reason 
that if they were marketable they would not be "on 
hand." The effect of investment of capital-funds 
in "stocks, securities, etc.," in many instances has 
been that such investment has come to be an added 
burden on banking equipment, instead of being an 
increased support to commercial credit-demands, 
and a primary cause for increasing credit disturbance 
by increasing the expansion and contraction of credit- 
funds. Since 1893 credit disturbances and inability 
of bank-credit to meet demands have increased, until 
"inelasticity" has become the most important prob- 
lem in American finance. 

Banking Equipment Purchased on Credit 

Within the last ten years there has been a gradual 
increase in the proportion of "money-reserves" to 
Inadequacy oj capital. The " money-reserves " have 
proprietary grown until for some time they have 

capital keen - n amoim j- aD0U t equal to the 

"share-capital" (not including "surplus "and "undi- 
vided profits") employed by National banks; and the 





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DANGERS IN PRESENT EQUIPMENT 135 

amount of "money-reserves" plus " unencumbered 
securities" has come to be larger than the combined 
total of ' i share-capital ' ' and ' ' surplus. ' ' This situa- 
tion, however, has not been associated with an in- 
crease in " money-reserves" proportionate to credit- 
liabilities, but with a decrease in capitalization. If 
we consider the loans to reserve agents as a part of 
redemption equipment, then the equipment of Na- 
tional banks for the support of credit-accounts far 
exceeds the proprietary capital provision made for 
its purchase — an anomalous position ; a situation to 
be explained only by the assumption that a part of 
the banking equipment had been purchased on credit. 
From a point of view of the proportion of banking 
equipment represented as being available, the banks 
are in a much stronger position than they were before 
1893, but this representation is without consideration 
of the adaptability of equipment to the purpose for 
which it is provided and used. As a matter of public 
concern, equipment is for the purpose of supporting 
the credit-accounts without contracting loans, and it is 
with reference to these that its strength must be 
measured. Capitalization must be considered simply 
as the means by which the equipment is to be pro- 
cured. Judged from this standard, the capital is 
inadequate to provide equipment used; and equip- 
ment used being procured on credit and weakened 
by this character of charge is inadequate to support 
banking demands. 



136 THE BANK AND THE TREASURY 

As before shown, the operation of the legal reserve 
clause of the National Bank Act has been to prevent 
a decrease in the amount of money held below a 
point necessary to meet ordinary current needs; but 
at the same time the credit load which the banks have 
attempted to carry has been multiplied until within 
the last ten years the proportion of total capital-re- 
sources to demand obligations has been materially 
lessened. Proportionate to the credit load to be 
supported, therefore, banking equipment has been 
weakened not only with reference to its quantity but 
also with reference to its quality. The increase in 

Increase in money-reserves has been due to an in- 

money-reserves . -, ,. ■. r , i 

due to increased creas f m relative weakness of total 

credit weakness banking equipment through an in- 
crease of credit-accounts outstanding. The equip- 
ment now used to support outstanding demand- 
credits is not only relatively weaker, but a large part 
of it, instead of being provided by means of capitali- 
zation, has been purchased or provided by means of 
the very current-accounts (the demand-credit) which 
the equipment so purchased was intended to support. 

Methods Employed to Increase Equipment without 
Increasing Capitalization 

Under a banking law which allows banks to pay 
interest on " deposits" of (loans from) other banks, 
— a law which permits the depositing (loaning) bank 
to count the loan a part of its cash — a premium is 



DANGERS IN PRESENT EQUIPMENT 137 

placed on an inferior kind of redemption equipment, 
and a practice has grown up which in many instances 
has destroyed the equipment character of the loan. 
On August 22, 1907, there were over $600,000,000 
of these reserve loans. Several points of weak- 
ness of the " loan to reserve agents "have already been 
The "loading" of referred to. A practice which com- 
" accounts with pletely thwarts the purpose of the Act 
reserve agents" and ^^ ^ < < reserve _account " 

wholly unavailable is known as "loading" balances 
or "mutual balances." Bank A deposits with (loans 
to) bank B (its reserve agent) $100,000. Bank B 
loans to bank C $100,000. Bank C loans to bank A 
$100,000. Under our present system of reporting, 
by such a series of transactions bank A having 
$100,000 in cash may count it as $200,000. If, how- 
ever, bank A were required to send in a report on 
some such classified form as that hereinbefore sug- 
gested, every transaction of this kind would appear 
on the balance-sheet as well as in the private instruc- 
tions to the Comptroller. 

The method of purchase of commercial assets de- 
scribed by Mr. Vanderlip has also been employed for 
procuring the capital equipment used to support com- 
mercial credit-funds. A corporation 

The credit i)ur- 

chase of securities wishing to float an issue, obtains an 

underwriting; or by some method it 

may get a quotation on the Street or on the Exchange. 

These issues, if underwritten by the bank, to the 



138 THE BANK AND THE TREASURY 

extent that advances are made on this account, are 
considered as " stocks, securities, etc." 

If not underwritten by the bank they may be used 
by the broker as collaterals for procuring increased 
loans; if the broker cannot obtain a loan on this sort 
of collateral at reasonable margins and interest, other 
securities may be substituted, and the broker may 
carry the new flotation against his own capital until 
the new issues are disposed of to the public. For the 
purpose of buying these increased loans to which the 
The credit pur- securities stand as collateral, the bank 
chase of "money- uses its own increased credit-accounts, 
which in turn are used by customers 
as cash to buy other securities. As the public grad- 
ually absorbs the securities offered, the banks are 
able to absorb larger volumes of money through 
voluntary payments made on loans, without increas- 
ing capital. 

This process of "loading" and of credit acquisition 
of equipment reserves may continue so long as credit 
inflation continues and the money supply of the 
country is increased by a favorable balance of foreign 
exchange on sales of goods; or the same result may 
be accomplished by decreased demand for legal- 
tender money to be used as " current cash" in the 
community. 

At last the tables turn. There is an increase in the 
demand for money on outstanding accounts. The 
balance of foreign exchange, on account of goods, 



DANGERS IN PRESENT EQUIPMENT 139 

grows less; with the increase of business activity the 
demand for money, for "till cash" and "change" 
increases; and again, the demand for money may be 
still further increased by the decreased use of bank- 
credit-accounts, due to doubt as to the ability of the 
The inherent banks to meet their customers' ac- 
weakness in such counts outstanding. At the same time 
practices there is a corresponding decrease in the 

demand for securities. The public no longer con- 
tinues to absorb stock and bond flotations offered by 
speculators and promoters, and the brokers are forced 
to carry increasing quantities of undigestible securities 
against their own capital . With falling prices of secur- 
ities, the banks inaugurate a process of liquidation of 
the loans, which in turn, not only wipes out margins, 
but also, on occasion, when the shrinkage in prices 
and in available assets of speculative customers has 
been too rapid, forces the bank to take securities in 
satisfaction of loans. These securities so taken are 
also added to their holdings of " stocks, securities, etc." 
The upshot of such practice is this: (i) That while 
money-reserves may be temporarily maintained to 
meet the provisions of law without curtailing com- 
mercial accommodation, market con- 
The public con- •,.,. -, . , ,, , ,^ , , ,. 

cerned ditions which call a halt to speculation 

place the banks in a position which 
forces liquidation of loans to maintain these 
"money-reserves"; (2) the current-accounts expand 
beyond a safe proportion to total resources purchased 



140 THE BANK AND THE TREASURY 

by means of invested capital; (3) the capital-invest- 
ments themselves become impaired in quality and 
are not readily convertible; (4) a part of the capital 
of the banks which should be used in the business is 
diverted to underwriting and speculative ventures; 
and (5) in time of credit contraction (the burden of 
procuring money as a means of meeting demands in 
the credit-accounts used by the banks to purchase 
income-bearing assets being forced on the commercial 
and industrial community) all profitable business 
suffers for lack of current funds. 

From the practice of National banks during the 
last ten years, some other interesting conclusions may 
be drawn. In the first place, it is evident that elas- 
ticity requires some sort of protection against the 
expansion of bank-credit beyond the margin of safety 
to available capital equipment provided by the bank 
for its support. In the second place, the conclusion 
before drawn seems beyond question, viz., that if 
banks are to give support to underwriting and to 
margin speculation, such capital equipment as is 
used to this end should be clearly distinguished from 
the equipment used in the commercial banking busi- 
ness. In the third place, the conclusion would seem 

beyond controversy, that when a bank 

Inherent dan- ., .,• 1 j •*. 

in its various capacities overloads its 

capital support, or permits itself to 

extend its credit beyond a point of safety, the only 

way the credit relations of a community may be 



DANGERS IN PRESENT EQUIPMENT 141 

maintained and brought within lines of safety with- 
out contracting commercial accommodation, and 
forcing a reduction in current credit-funds, is by 
enlisting the support of new and increased capital — 
a banking capital large enough not only to support 
its regular commercial business with safety, but also 
to provide the funds necessary to carry on the various 
underwriting and speculative enterprises through 
which the banks are forced into a position of contrib- 
uting capital for the permanent equipment of new 
promotions. 

The Increasing Weakness of Banks in Periods of 

Credit Expansion or So-Called Periods of 

Prosperity 

To illustrate the need for a correlation of both 
" money-reserve " and "reserve-capital investments" 
(or total redemption equipment) to credit-accounts 
outstanding, the exhibit on Chart XIII is referred 
to. Taking the record of the last forty years it 
would be shown that periods of credit strain have 
been periods of relatively low capitalization and over- 
taxed equipment. These also have been periods in 
which demands for greater elasticity have been 
Failure in the heard. It is also quite as apparent 

credit ^ufilorT * ^ at there nas ^ een an ever increasing 
with credit strain ratio of credit obligations to capital 
equipment. Assuming the most favorable hypoth- 
esis possible — that the whole capital of the banks 



142 THE BANK AND THE TREASURY 

has been properly invested in resources which may be 
used to support accounts outstanding — no other evi- 
dence is needed of over-issue of credit-accounts or over- 
sale of "deposit" obligations on the part of the banks. 
Periods of speculation have carried credit-accounts 
out of all safe proportion to capital invested as a 
means of providing equipment for the business. As 
a result, when money-demands on exchange-balances 
have increased, the banks have been forced to curtail 
loans to customers to procure the money necessary 
to make payments to other banks. Periods of de- 
pression and of financial reorganization have followed 
so-called periods of prosperity and credit expansion; 
so-called periods of depression have been seasons of 
readjustment of current credit to capitalization. If 
we reduce this experience during the last period of 
prosperity to a base of percentages, a tabulation of 
results would be as follows: 

Per cent of Per cent of Per cent of 

v Capitalization Vpnr Capitalization v Capitalization 

1 ear to Customers- x ear to Customers- x ear to Customers- 

Accounts Sold Accounts Sold Accounts Sold 

1896 56 1900 35 1904 34 

1897 49 1901 31 1905 31 

1898 42 1902 32 1906 31 

1899 33 *9°3 36 1907 3 1 

Again engaging the most favorable assumption 
(that, duing this period, all of the capitalization of 
the National banks was invested in the best of bank- 
ing equipment, and that during all this period there 
was no weakness in the character of capital-resources 
held), the showing is an interesting one. From the 



DANGERS IN PRESENT EQUIPMENT 143 

foregoing it will appear that in 1896 the capitalization 
(share capital and surplus) was fifty-six per cent of 
Increasing weak- tne amount of credit-accounts (de- 
ness in periods of posits) sold to customers. From 1896 
pros pen y to 190 1, or the period of credit expan- 

sion, the banks had so far increased the proportion of 
the demand-credit obligations sold to customers that 
they had reduced their capital equipment to thirty- 
one per cent. Forced liquidation in 1902 and 1903 
brought the ratio up to thirty- six per cent. Sub- 
sequent credit expansion carried the ratio in 
1906 below thirty-one per cent — a complete dem- 
onstration of need for correlation of capital to 
expansion. 

The disturbances caused to business were well- 
nigh equal to those caused by the issue of green- 
backs during the Civil War; during the years of 
liquidation the loss sustained to securities (by parties 

The credit dis- n whom these documentary proper- 
turbance equal to .. , •. , -, ■, 1 . r 

that of the green- ties had been unloaded in times of 

back inflation so-called prosperity) was quite as 
great as the cost of carrying on the greatest military 
campaign in history. And it is not certain that the 
lesson has yet been learned; for we find that imme- 
diately following long periods of forced liquidation 
when money and credit-demands had suddenly 
grown less, the New York banks alone again in- 
crease their sales of credit-accounts (deposits) many 
millions of dollars. This operated on business in 



144 THE BANK AND THE TREASURY 

the same manner as if there had been a sudden in- 
crease in the money circulation of like amount. The 
press again congratulated the public on a business 
revival. Little thought was given to a possible day 
of reckoning. 

The experience of the last forty years of National 
banking (and the same experience might be shown 
in State and private banks) suggests that some limit 
should be placed on bank-credit issues (deposits) 
other than that found in the " legal money- reserve"; 

that " reserve-capital investments" 
A limit of safety , ,, , «j j n 

needed should be considered as well as 

money-reserves ; that, while the Comp- 
troller may properly interest himself in the money 
equipment of a bank as a safeguard to credit, he 
should also have the power to call a halt on increasing 
credit-issue beyond a safe proportion to total un- 
impaired redemption equipment — i.e., the total cash 
and assets readily convertible into cash without calling 
in commercial loans. 

Federal authorities should be given such powers 
that they might force the stockholders of a bank to 
increase its capitalization when it attempts to handle 
a volume of business disproportionate to its capital- 
Should be regu- ized equipment — i.e., to force the 
lated by federal banks to discontinue the practice of 
authority issuing credit beyond the point of 

safety. Such legislative and administrative control 
over our credit institutions is just as imperative as 



DANGERS IN PRESENT EQUIPMENT 145 

that directed toward the limitation of credit-money 
strain on the gold-reserve of the Treasury, the limi- 
tation of strain on the structure of bridges or the 
equipment of mines, or the enactment of legislation 
for safety of buildings devoted to manufacturing, etc. 
It should be recognized that the credit equipment, 
when overstrained, is hazardous, not alone to those 
immediately involved, but also to the business in- 
terests of the entire nation. 

A step in the right direction has been taken by 
Senators Culberson and Hayburn, each of whom 
on January 7, 1908, introduced bills requiring that 
the "legal reserve" shall be a money-reserve. Sen- 
ator Hayburn (S. 3044) goes farther than Senator 

Culberson (S. 3027) in that he would 
Two bills before , ., ., , , ,. *. , 

Congress arbitrarily establish twenty per-cen- 

tum as the minimum of lawful money- 
reserve to be held. Whatever be the ratio fixed it 
should have reference to experience and a liberal 
margin of safety should be added to prevent violent 
contractions due to money-demands. In Senator 
Hayburn' s measure a wholesome provision is sug- 
gested, viz.: whenever the lawful money of any 
such association shall be below the percentum re- 
quired the bank shall not increase its liabilities or 
make new loans till the ratio is re-established. 



Chapter XI 

WHY THE "UNENCUMBERED SECURITIES" OF 

NATIONAL BANKS ARE NOT READILY 

CONVERTIBLE INTO CASH 

It has been assumed that, under our present bank- 
ing system, "unencumbered securities " are the most 
available of the capital assets or redemption equip- 
ment to meet money-demands in time of strain 
without curtailing commercial accommodations. At 
the risk of tedium, the reasons for this conclusion 
will be retold: (i) That commercial paper, whether 
purchased by means of capital or on credit-account 
may not be converted into cash, except in so far as 
it may be voluntarily paid, without impairing the 
elasticity of credit accommodations, for the purpose 
of obtaining money to meet demands on credit-ac- 
Points of superi- counts without contraction ; therefore, 

onty of unen- i oans mus t b e considered as "contin- 
cumoered secur- 
ities" gent." (2) The effect of forcing pay- 
ment of loans to (amounts due from) reserve agents, 
at times, is to curtail banking accommodations of the 
reserve banks and therefore to impair the elasticity 
of "customers- accounts " in the reserve cities — i.e., 
to cause contraction instead of allowing expansion of 

[146] 



WHY SECURITIES ARE NOT CONVERTIBLE 147 

this form of current funds. (3) The securities de- 
posited " for circulation" and " for deposits" of Gov- 
ernment cannot be utilized. When the cash-reserves 
are threatened, the only class of assets of considerable 
amount remaining that is readily available, and which 
will make possible the expansion of credit-accounts 
when expansion is demanded, is " unencumbered 
securities." 

The Use oj Banking Capital jor Outlays in 
Unavailable Assets 

With the exercise of good banking judgment, " un- 
encumbered securities" might be utilized to obtain 
new supplies of cash to support the "money-reserve." 
Assuming that the assets of this class held by banks 
are " available," our commercial-credit institutions 
are in a stronger position to-day and may give greater 
elasticity to their credit-accounts than ever before. 
This delectable conclusion might be admitted, were 
it not for two trite facts: (1) that during the two years 
following September, 1902, the banks were hard 
pressed for money and the business community 
suffered enormous liquidation on account of "inelas- 
Investment in ticity" of bank-credit; (2) that the 
unavailable se- banks during this time did not to any 
great extent, indeed, throughout a 
long banking experience, they have not taken any 
considerable portion of securities to market and sold 
them for cash to relieve sudden pressure. The un- 



148 THE BANK AND THE TREASURY 

encumbered securities held have been constantly 
increasing; the amount held by the National banks 
has during the last thirty years increased from a 
small holding to about $700,000,000. The increase has 
been gradual, almost without a break in the line (see 
opposite page 244), yet the banks have not to similar 
extent utilized securities to meet money-demands or 
to support money-reserves; they have not by sale 
converted them into cash. On the contrary, they 
have, on numerous occasions, in time of financial 
peril, increased their holdings of securities, and 
thereby increased the weight of liquidation which 
has been thrown on assets acquired by means of their 
own demand liabilities. 

Now the question may fairly be raised — Why is it 
that so large a part of the capital-assets of banks 
has not been used to obtain money to protect de- 
mands for money made on their credit-accounts; why 
has the principle of elasticity of accounts been sacri- 
ficed, when unencumbered assets were at hand to 
The principle of support the credit of institutions 
elasticity sacri- whose business it is to purchase com- 
' lce mercial paper "on account" and to 

provide current funds to the community when 
needed? By referring to the chart (page 244), it 
will be seen that "commercial assets" and not "se- 
curities" have responded to money-demands. The 
fact stands out boldly that the customer has been 
sacrificed and that business accommodations have 



WHY SECURITIES ARE NOT CONVERTIBLE 149 

been neglected; good commercial paper has been 
turned away and good loans have been called or 
reduced to protect capital-investments in the form 
of securities owned. It is in this fact and in this 
situation that we must look for much of the practice 
that has stood in the way of " elasticity." 

If we ask a banker why he does not sell his stocks 
and other unencumbered securities for cash with 
which to protect his customers-accounts without 
curtailing loans, he will say that under the existing 
system and practice he cannot do so without loss to 
Why the banker the capital-resources of his institution. 
does not sell The practical business problem is, 
securities therefore: Shall the bank suffer a 

capital loss in its efforts to obtain money with which 
to make good its accounts, or shall the public suffer 
from inelasticity of bank-credit? In such an emer- 
gency, there is only one way that a faithful bank 
officer can answer such a question: The burden of 
loss must be shifted, if possible, and forced liquida- 
tion is the result. A better solution would have been 
not to have allowed the bank to get into such a 
situation. But for this the banker is not entirely at 
fault; this has not come from any disposition on his 
part to curtail accommodations nor to deprive his 
customer of needed funds. The trouble has been 
in the kind of competition that he has been forced to 
meet and in the system which he is employed to 
operate. 



150 THE BANK AND THE TREASURY 

An explanation which has been offered to account 
for the relatively unvarying amount of securities re- 
ported by banks is, that these securities are used as 
collateral security for " bills payable" and "other 
liabilities" such as temporary loans from other finan- 
cial institutions. While there is considerable of 
fluctuation in "bills payable" and "other liabilities," 
and these fluctuations respond in a measure to periods 
The claim that of extraordinary money-demand, they 
they are used jor do not account for more than a small 
collateral part of the evident "inconvertibility." 

A better reason why "unencumbered securities" 
have not been "convertible into cash in time of 
panic," as a means of support to "money-reserves," 
seems to be in an interpretation of the statistical 
exhibits of the annual reports of the Comptroller. 
The increase in Stocks and Other Securities owned 
by National Banks during the ten years 1 898-1 907 
inclusive, in millions is given as follows: 1898, 255; 
1899, 320; 1900, 367; 1901, 448; 1902, 493; I0O 3> 
518; 1904, 589; 1905, 667; 1906, 674; 1907, $700. 

The Character of Securities Held by Banks 

The securities owned have been an increasing "un- 
encumbered asset." The power of one to convert 
property into money depends on a market; the gain 
or loss depends on the price obtained as compared 
with cost; the price obtainable depends on the pur- 
chasing demand at the time the offer is made. This 



WHY SECURITIES ARE NOT CONVERTIBLE 151 

takes us into a more general banking situation. The 
National bank is only one of four classes of institu- 
tions pressed for money at the same time and having 
the same kind of securities for sale. It must enter a 
market in which State banks, private banks, and the 
trust companies, — besides, on occasion, in a smaller 
way, the savings banks, — are also buying and sell- 
ing. If we take into account the holdings of simi- 
lar unencumbered securities by these institutions for 
five years they appear as follows: 

Railroad Securities 

(Amounts in Millions) 

1898 1809 1900 1901 1902 1903 1904 1905 1906 1907 

State banks $ .6 $ .2 $ .3 $2.4 $3.3 $3.3 $3.8 $ .9 $2.4 $5.1 

Private banks 7 .3 .5 1.3 .7 .8 3.2 4.5 .6 .5 

Trust companies 14.6 12.5 10.4 22.0 18.0 21.7 32.8 31.6 46.6 31.8 

Totals $15.9 $13.0 $11.2 $25.7 $22.0 $25.8 $39.8 $37.0 $49.6 $37.4 

Banks, Stocks, etc. 
(Amounts in Millions) 

1808 1899 1900 1901 1902 1903 1904 1905 1906 1907 

State banks $2.6 $2.2 $ .4 $ .1 $ .2 $ .2 $ .9 $ .4 $ .5 $1.1 

Private banks .3 .3 .4 .4 .4 .5 .3 .6 .2 .2 

Trust companies .9 1.2 .2 3.2 2.6 3.4 4.1 4.4 10. 1 6.5 

Totals $3.8 $3.7 $1.0 $3.7 $3.2 $4.1 $5-3 $5-4 $i°.S $7-8 

Other Stocks, Bonds and Securities — not including United States, State, 
County and Municipal Bonds 

(Amounts in Millions) 

1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 

State banks .. . $121.5 $160.7 $i79-6 $228.5 $267.1 $276.5 $332.8 $395-6 $394-4 $475-4 

Private banks. 2.1 2.0 2.4 4.1 3.2 4.2 3.8 4.3 4.7 7.9 

Trust Co's... 137-8 216.4 3Q5-9 358-5 412.8 535-9 609.8 732-3 684.6 735-1 

Totals.,.,. $261.4 $379.1 $487-9 $59i-i $683.1 $816.6 $946.4 $1132.3 $1083.7 $1218.4 



152 THE BANK AND THE TREASURY 

Total Securities Owned by State Banks, Private Banks and Trust Com- 
panies, other than United States, State, County and Municipal Bonds 

(Amounts in Millions) 
1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 

Railroads $15-9 $13-0 $11-2 $25.7 $22.0 $25.8 $39.8 $37.0 $39.6 $37.4 

Banks 3-8 3-7 1° 3-7 3-2 4-i 5-3 5-4 10.8 7.8 

Other stks., etc. 261.4 379.1 487-9 59*-i 683.1 816.6 9464 1132.2 1083.7 1218.4 
Totals $281.1 $3958 $500.1 $620.5 $708.3 $846.5 $99i-5 $n74-6 $1134.1 $1263.6 

Total Stocks and other Securities Owned by Commercial Banks 
(Amounts in Millions) 

1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 

National bks. $255.2 $320.4 $367.3 $448.6 $493-* $518.7 $589.2 $667.2 $674.9 $700.4 

Other bks. .. 281. 1 395.8 500.1 620.5 708.3 846.5 991.5 1174.6 1134.1 1263.6 

Totals $536.3 $716.2 $867-4 $1069.1 $1201.4 $1365.2 $1580.7 $1841.8 $1809.0 $1964.0 

The foregoing exhibits show that in State banks, 
in private banks, and in trust companies, there has 
been a remarkable increase in securities held, and 
that nearly the whole amount has been in stocks 
and bonds other than "Railroads," "Banks," 
"United States," "States," "Counties," or "Muni- 
cipals" (for these are not included). The increase 
has been largely in those securities known as "other 
stocks, bonds, etc." We know that many of these 
institutions have been active in underwriting in- 
dustrial and other current issues; 
Proportion of . e ,, , 

industrials, etc. m so far as these are represented 
they are still in the form of "un- 
digested securities." We have no sufficient data 
for the closer classification of "bonds, securities, 
etc.," owned by National banks, but it may fairly 
be assumed that they have been somewhat simi- 
larly involved in the practice that has been so prev- 






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WHY SECURITIES ARE NOT CONVERTIBLE 153 

alent with private banks, State banks, and trust 
companies. In this practice, which ties up the capi- 
tal of banks in securities which are not readily ac- 
ceptable as collateral, and in the efforts of the banks 
to prevent investment loss in forced sales, may be 
found one of the reasons for the present "inconvert- 
ibility of securities.' ' 

The Effect of Call-Loans on the Use of Unencumbered 
Securities as Redemption Equipment 

The uncomfortable financial gastritis caused by 
"undigested securities," however, will not explain 
the persistence of similar conditions of inconverti- 
bility extending back thirty or forty years. For 
explanation of this another market situation may be 
appealed to. From the report of the Comptroller it 
appears that at the time of great liquidations these 
various banks were holding a large amount of col- 
laterally secured loans, to which, if we add a twenty 
per cent margin as a basis for estimate of the stocks 
held in trust, would make an aggregate of securi- 
ties much larger than their own holdings, to the sale 
of which they look for the payment of loans. 
In this situation may be found a continuing or 
persistent force — a reason in self-preservation — 
for the inconvertibility of securities owned. To 
attempt to sell their own holdings of $1,964,000,- 
000 in time of financial strain would threaten the 
market for a much larger amount of collateral 



154 THE BANK AND THE TREASURY 

security, on the sale of which loans depend for pay- 
ment. The loss from sudden conversion of ' ' stocks ' ' 
owned, therefore, would be a double one. It would 
depreciate the properties owned by the bank and at 
the same time would threaten loss on collateral loans. 
In these circumstances the only solution, without loss 
to the bank, is such a careful handling as will allow 
the bank to obtain money desired without any sud- 
den shock to the stock market. 

The Need for Separate Capitalization for 
"Speculation" and "Underwriting" 

The present and continuing practice of under- 
writing and of loaning on collaterals to speculators 
gives the key to the inability of the banks to use this 
class of capital assets to support their credit — to the 
inconvertibility of " unencumbered securities.' ' In- 
stead of looking to stocks and bonds for investment 
of "surplus capital-resources" and holding these as 
a means of protecting the money-reserve from deple- 
tion, instead of looking to these investments as a part 
of the equipment provided out of capital to support 
the current-accounts of customers (the stock in trade 
of the bank) there has ever been a temptation for 
The different banks to turn a part of their capital- 
financial charac- resources away f rom t h e commercial 
ter of these bust- m # J 

nesses banking business. In the early part 

of the past century real-estate was the attraction; 
investment and speculation in this came to be so 



WHY SECURITIES ARE NOT CONVERTIBLE 155 

dangerous a practice as to bring forth universal con- 
demnation, which resulted in the enactment of stat- 
utes prohibiting real-estate purchases. Later, stocks 
and bond issues of corporations attracted the funds 
of the banker. The more recent practice has been 
defended on the ground that securities are more 
readily convertible into cash. As a matter of prac- 
tice, however, under our present system of " reserves" 
and "call-loans," they are not and never have been 
quickly convertible assets when an invested capital 
reserve is really needed to support customers-ac- 
counts. They have proved not quite so dangerous to 
the banks themselves as real-estate investments, but 
quite as dangerous to the country at large; and the 
institution so owning " securities," when sorely 
pressed, have not been able to utilize them to ad- 
vantage as an in vested-reserve. In May, 1907, 
when money-demands were large, it was found ex- 
pedient for the National banks to borrow $83,000,000 
of bonds from other institutions. When with all 
their "securities" they have been unable to obtain 
the requisite funds, they have done the only thing 
possible to do, viz., turned to commercial assets, 
forced their loans, and shifted the burden so far as 
possible on the community, rather than themselves 
suffer an investment loss on forced sales of securities. 
The principle that the commercial bank should 
furnish funds for speculation without special capi- 
talization for that purpose is a wrong one ; it results 



156 THE BANK AND THE TREASURY 

in destroying, in part at least, its usefulness as a 
commercial banking institution * If marginal specu- 
lation is to remain a prominent fea- 
Conclusions as r • i • i • ,«, • 

to practice ture in nnancial circles, institutions 

intended primarily to serve such a 
constituency should stand on their own basis of 
capitalization, and should have a financial equip- 
ment in the form of resources especially adapted to 
success in the rendering of such service. The com- 
mercial bank which builds up a " call-loan' ' con- 
stituency encourages a practice and a use of banking 
capital which in time of strain not only precludes 
the possibility of converting unencumbered securi- 
ties owned, but also loads the market with collat- 
eral loans and shuts the door of opportunity for 
obtaining money, by sale or by hypothecation of 
capital-resources held in reserve. 

*To show the disturbing influence of speculation the chart on p. 160 
has been prepared. From this it will be seen that during the period from 
1893 to 1897 the individual accounts (deposits) and the " loans and dis- 
counts " of New York banks followed along parallel lines. This was a 
period during which New York banks were supporting a relatively small 
volume of speculation. From 1897 to 1902 the speculative activity of 
the metropolis was the most conspicuous feature. The disturbance of 
commercial-credit relations is traced in the erratic movement of the lines. 
At times the loans and discounts nearly equal current obligations. Again, 
within a few months there will be a disparity amounting to several hun- 
dred millions of dollars. This speculative result cannot be considered a 
wholesome one for a commercial bank. 



Chapter XII 

FALSE ASSUMPTIONS MADE BY THE GOVERNMENT 
WITH RESPECT TO CURRENCY AND BANKING 

The failure on the part of legislators and admin- 
istrative officers to appreciate the distinction between 
the functions of the Treasury as the sole agency of 
money-issue, and the functions of the commercial 
bank as the sole agency for the issue and redemption 
of commercial-credit used as current funds under the 
American financial system, has led to legal provisions 
and to practices which are in large measure respon- 
sible for the undesirable condition of our circulating 
Failure to appre- medium as well as for the present 
ciate character of inadequacy of bank capitalization and 
Treasury issues re d e mption equipment. It was not 
until the last decade that a proper appreciation was 
had of the provisions to be made for the support of 
the credit-moneys issued by the Treasury. This 
having been brought to the attention of the country 
in 1893, the same motives which moved the people 
to demand security for State bank issues after the 
fall of the first and second banks of the United States, 
the same motive that sanctioned the establishment 

[157] 



158 THE BANK AND THE TREASURY 

of an independent Treasury, that made the issues of 
the National Treasury more acceptable in business 
than the mixed and uncertain State bank circulation, 
and that brought popular support to the National 
banking system, called forth an expression favorable 
to " sound money" on every occasion that the issue 
has been raised. 

The controversy of the recent money campaigns 
was not one as to whether the Treasury should so 
fortify itself that its issues or money promises should 
be immediately redeemable ; this point was conceded 
by both factions. The question was as to the stand- 
ard to be adopted as a basis for issue and redemption. 
The silver party urged that gold was becoming rela- 
tively scarce, as evidenced by an almost continuous 
fall in prices since 1873, and that the adoption of a 
gold standard of money and credit would perpetuate 
conditions unfavorable to commerce and industry; 

the gold party held that the adminis- 
Contention in the . .. .... 1 «• .1 ■, 

money campaign tratlve attitude for the last twenty 

years had been to make all contracts 
for money payment gold obligations, and that a 
change of standard such as the silver party urged 
would cause financial disturbances that would be 
ruinous. The refusal of the silver party to make a 
declaration that all past contracts should be con- 
sidered as gold contracts lent color to accusations of 
intention to dishonor. But whatever may be said 
of the standard controversy, it must be admitted that 



ASSUMPTIONS MADE BY THE GOVERNMENT 159 

the sentiment for "sound money" — a money every 
dollar of which would be redeemed on demand at par 
in the standard adopted — was practically unani- 
mous. In the elections which followed the people 
chose gold for the money standard, and the subse- 
quent increase in gold production has reacted in 
price ratios in such manner as to make this choice 
acceptable to both parties and to eliminate the 
"standard" controversy from politics. The effect 
of the last few years has been to so fortify the Treas- 
ury as to enable it to redeem its money obligations in 
gold — in other words, to make a gold standard 
credit-money a sound one. 

The recurrence of a period of credit contraction 
and financial depression has brought the other arm 
of our financial system under popular as well as 
official scrutiny. As never before the public is be- 
ginning to realize that there is something wrong with 
institutions of commercial-credit. Animated by the 
same motive as in the past — a desire for soundness 
Failure to appre- in the financial system — but con- 
ciate the character vinced also of the need for a sort of 
of bank-credit ad j ustment that wi n make the system 

capable of adapting itself to the fluctuating demands 
for commercial accommodation, the thought of the 
people is again turned toward financial reform. 

The "soundness" required of banks as public 
agencies of commercial-credit is not only one of 
ability to pay, but ability to pay without disturbing 



160 THE BANK AND THE TREASURY 

the credit relations of the country. With respect to 
the banks, as well as the Treasury, it is recognized 

A campaign for that m tne P ast tne Government failed 
elasticity in to appreciate its responsibilities. It 
has also failed to grasp the problem 
before it; it has assumed an attitude that has proved 
harmful — has engaged assumptions which must be 
abandoned before a better adjustment can be made 
to American business conditions. 

The Assumption of the Government that the "Cash-" 

Reserve is the Only Reserve Needed jor 

Credit-Accounts 

The dangers inherent in the reserve practice have 

been discussed in another relation. It may also be 

considered with respect to the attitude of the Federal 

Government. The first effect of the assumption that 

the " cash ''-reserve is the only guarantee needed for 

credit-accounts was the incorporation of this fallacy 

in the National Bank Act. It has already been 

pointed out that such a legal requirement may be 

complied with without the use of a bank's capital by 

borrowing money from customers or from other 

banks; it has been further shown that 
Gives no key to , , . . . j . i t» i 

capital strength the permission given under the Bank 

Act for a bank to count its loans to 
other banks as "cash" allows the banks to inflate 
their legal reserves by process of maintaining "mu- 
tual balances." The lack of legal provision requir- 



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ASSUMPTIONS MADE BY THE GOVERNMENT 161 

ing a coordination of equipment provided by means 
of capitalization with total " deposits" or credit- 
accounts outstanding leaves no protection to the 
customer and no adequate guarantee of such a char- 
acter of soundness for commercial-credit-funds as 
will protect the public. 

Aside from the capital weakness induced by prac- 
tices thus encouraged, another effect of the provisions 
of the Bank Act, based on this assumption, is to 
leave the system without possibilities of credit ex- 
pansion when there is a coincident increased demand 
on the banks for money — i.e., without power to 
adapt itself to the expanding and contracting de- 
mands for commercial accommodation without vio- 
lation of the " legal preserve " requirement. Under 
such a provision of law, the money-reserve itself is 
Government con- n °t available to meet demands on 
trot of this kind credit obligations. And there is no 
forces inelasticity provision made for obt aining more 

money to support new credit-accounts. As a result, 
when demands increase, accommodations must be 
restricted in order to preserve the integrity of the 
legal money-reserve kept by the bank to meet money- 
demands. The Government, through its Depart- 
ment of Comptrol, therefore, having first set up a 
fund to guarantee the financial integrity of the insti- 
tutions issuing credit, places itself in the way of the 
bank using this fund for the very purpose for which 
it was created. By this attitude the Government 



162 THE BANK AND THE TREASURY 

often forces a bank to fall back on its constituency 
and force a reduction in accommodations. Thus, 
under the operation of the assumption made, the 
legal system of control becomes an element of pri- 
mary disturbance, and the bank, even when finan- 
cially sound, may fall into the hands of a receiver, 
thus adding still further to the credit-constrictions 
and credit-contractions against which complaint is 
entered. 

Another result of the Law requiring a minimum 
reserve to be kept, and looking to this only for pro- 
tection of accounts, is to limit the exercise of functions 

of comptrol and prevent inquiries 
Limits intelligent ■, . , , • -, , i t i r 

control which are essential to a knowledge of 

financial condition. Before reform in 

legislation can take place there must be a complete 

abandonment of the "reserve'' principle which now 

stands as a fundamental feature of the Bank Act. 

An Assumption that the "Note-Issue" is not a Loan 
to the Bank without Interest 

A second assumption that has led astray legisla- 
tors and bankers is, that the "note-issue" is not a 
Government loan to the bank without interest. It 
has before been pointed out that the 

YuppoT CapUal note is obtained by the bank entering 

into a contract with the Government 

for the delivery of an amount of money equal to 

the amount of issues received, the contract for pay- 



ASSUMPTIONS MADE BY THE GOVERNMENT 163 

merit being secured by United States bonds. It 
has also been observed that this amounts to an ex- 
change of obligations by which the Government 
(through the bond market thus created) receives 
money for its purposes and the banks obtain " issues'' 
with which to do business, a device which ties up the 
capital of the bank and places on it the duty of first 
redemption of the note. But the weakening of the 
capital support to the banking business — that sup- 
port available for redemption of current credit-obli- 
gations — is not the only public danger which lies in 
the assumption. 

Viewing the bank-note as a money-issue, the policy 
of the Government favoring the expansion of this 
part of the currency is directly opposed to its policy 
restricting issues of Treasury-notes. Since the close 
of the Civil War there has been a growing sentiment 
favoring the payment of the outstanding National 
floating debt in the form of "greenbacks." Cam- 
paigns for "sound money" have been waged to re- 
duce demand-credit-obligations and to secure the 
foundations of gold-standard currency-issues. One 
Induces currency of tne most threatening features of 
disturbances our whole financial system has been 

throughnote-issues ^ rdativdy krge amount of credit . 

money obligations proportionate to the reserve kept 
to enable the Treasury to redeem. The operation 
of the "endless chain" through the Treasury in 1893, 
the shock to credit, private and public, following the 



164 THE BANK AND THE TREASURY 

threatened disappearance of the gold-reserve, the 
pledges of 1896, the currency act of 1900 increasing 
the reserve to $150,000,000, making the reserve a 
trust fund and securing it against impairment by 
giving to the Bureau of Issues and Redemption a 
first lien on the current assets of the General Treas- 
ury, the loan power placed in the hands of the Treas- 
urer as a means of giving force to the instruction to 
maintain the gold standard of credit-money redemp- 
tion, the increasing demands for the retirement of 
Treasury-notes and proposed legislation for making 
silver subsidiary, — all these acts and tendencies are 
directly antagonized by an increase in bank-note 
issues. By the inflation of the currency with paper 
issues in the form of collateral notes that may be 
arbitrarily injected into the circulation as a matter 
of high finance, gold and gold-bearing obligations of 
the Treasury may be supplanted and the money 
system itself may become unsettled. 

Another dangerous feature of the practice of note 
inflation is in the possibility of increasing obligations 
for gold payment (for the note is ultimately reduced 
to this) without making any additional provision for 
gold redemption-reserves in the banks or in the 
Treasury. By law the banks must 
serves **° P a ^ * ne notes if presented. In its 

original form the Law contained pro- 
visions for a redemption-reserve. This, however, has 
been repealed to further stimulate the investment of 



ASSUMPTIONS MADE BY THE GOVERNMENT 165 

bank capital in Government bonds. Having in it 
possibilities of increasing issues to such a point as to 
drive gold out of circulation it lays bare our credit- 
money system at its most vulnerable point. The 
danger is increased at two particulars: (i) The gold 
supply may by exportation become too small to 
support the credit-issues of the Treasury, without 
provision made for Government loans to stimulate 
gold importation; and (2) the paper-issues may be- 
come so far expanded that the present stock of gold 
may be found inadequate even though no exportation 
takes place. 

That such a result is not beyond reason may ap- 
pear in the experience of the last three or four years. 
Since the bond refunding acts and the Law of 1900, 
amending the Bank Act, this inflation of the currency 
has been marked. February 4, 1898, only $184,106,- 
000 of National bank-notes were outstanding; Feb- 
ruary, 1900, the amount had risen to $204,916,000. 
One year later they had increased over $104,654,000. 
September 9, 1903, the amount of notes outstanding 
are reported as $375,037,000; and January 1, 1908, 
the bank circulation was reported in excess of $600,- 
000,000, with a rapidly increasing output of this 

class of currency. The effect of 
The recent in- . , , , , ■. 

crease in issues the increase in bank-notes on the 

money circulation is identically the 
same as an increase of like amount in greenbacks 
would have been. The greenbacks and silver obli- 



166 THE BANK AND THE TREASURY 

gations remaining about the same, the bank-note has 
supplanted that much of gold, has made unprofitable 
gold importation, and at times has made profitable 
the exportation of the standard metal when otherwise 
exportation would have been unprofitable. For ten 
years we have been devising ways and means to 
retain a larger amount of gold as a foundation for 
money and credit. Since 1897 we nave more than 
doubled our credit and increased our money cir- 
culation over $900,000,000. At the same time, by 
encouraging an increase in bank-notes, we effect- 
ively barred the way to gold importation until the 
note expansion reached a point to produce a shock 
in credit relations. Many editorials have been 
written in financial periodicals attempting to ac- 
count for the gold movement, but, strangely enough, 
the influence of the bank-note inflation has scarcely 
been adverted to. The great public danger which lies 
in the assumption that a note-issue is not a loan to 
the bank without interest is to be found in the fact 
that such an assumption permits the bank-note to 
be made a part of the permanent money stock in- 
stead of forcing upon it an emergency character 
which will allow of its issue with profit only when 
the money-demand is increased, and will compel 
retirement when money-demands fall off. In ninety 
per cent of the measures now pending in Congress 
the authors of bills would permanently increase the 
bank-note circulation by failure to provide for an 
adequate charge on notes outstanding. 



ASSUMPTIONS MADE BY THE GOVERNMENT 167 

The Assumption that "Deposits" by the Govern- 
ment are not Loans without Interest 

The third dangerous assumption is, that so-called 

"deposits" of money by the Government are not 

loans to the banks without interest. Mr. Eckels 

pleads for treating the Government deposits in the 

same manner as customers' deposits. He holds that 

the attitude of the Government requires security for 

deposits is one which tends to discredit the bank. 

This conclusion may be conceded to 
Mr. Eckels' plea ,, , ,, , ,, n , . . 

for deposits tne extent tnat tne Government is in 

need of active credit-accounts in the 
transaction of its business. The fact is, however, 
that at the time Mr. Eckels' comment was offered, 
the Government had on deposit with banks about 
$170,000,000, whereas its current needs, or its use for 
credit-accounts of banks, amounted to only from 
$5,000,000 to $10,000,000 as represented in the de- 
posits of disbursing officers. The balance, some- 
thing over $160,000,000, was an inactive account, and 
was in the nature of a loan to the banks without 
interest. 

A business man who has from ten to twenty times 
as large a cash fund as is needed for current use, cer- 
tainly would not be expected to keep this on deposit 
in a commercial bank, unless the commercial bank 
made an arrangement with him to pay him a liberal 
rate of interest on his deposit. Such an arrangement 



168 THE BANK AND THE TREASURY 

would amount to a loan from the customer to the 

bank. When such deposits are made they are usually 

represented by certificates-of-deposit, 
The " deposit" a , i 

l oan r or are under such agreements as to 

distinguish them clearly from the ac- 
tive accounts of customers. To argue that a deposit 
of all the revenues of the Government should be made 
with the banks, and that these should be considered 
as an ordinary customer's account, does not comport 
with the practice of banks nor with the business rea- 
soning of those very men who are now using the 
argument for the purpose of bringing public opinion 
to support such a conclusion. 

If the contention were that the Government should 
make such deposits, but that the bank was to pay a 
reasonable interest for the same, then there might be 
some ground of support to the argument. But in 

How "deposits" fa e same process of reasoning by 
without interest ■, • , ., . ■, ■, j , ^ , , 1 ^ . 

weaken capital whlch xt 1S held t hat the^ Government 
support should be considered in the same 

light as other depositors, the advocates of this doc- 
trine also affirm that the bank " cannot afford to pay 
interest on such deposits." The result of such a 
transfer of money from the United States Treasury 
to the banks has been to encourage the banks in time 
of minimum money-demand to rely on the funds of 
the Government for the support of their own credit- 
accounts, instead of relying on their own capitaliza- 
tion. 



ASSUMPTIONS MADE BY THE GOVERNMENT 169 

The weakening of capital support to bank-credit- 
accounts is not the only cause for public anxiety. 
The " deposit" of general funds of the Treasury 
leaves nothing to support the gold-reserve but bank- 
credit. Under such a financial plan we would have 
a credit-money that in time of special financial stress 
would find its foundation in the credit of the very 
institutions on which the greatest pressure is brought 
Makes the Gov- for money payment. Gold redemp- 
emment a disturb- tions and the maintenance of the 
mgjacor Treasury reserve when redemptions 

are made in emergency must fall on the bank. But 
the monetary disturbance does not end here; a " de- 
posit" of gold by the Government causes the bank 
to dispose of gold previously held. This dislodge- 
ment of gold from the reserves also leaves the bank 
in a less advantageous position for redeeming its 
note-issues when demands may be made on these. 
The whole effect is the same as a credit-money in- 
flation; it tends to increase gold exportation in time 
of minimum money-demand, and to accentuate or 
increase gold importation in time of maximum 
money-demand. 

In appeals to the confidence of the public it is 
common practice for banks to advertise themselves 
as " Government Depository." The implication is 
that such a relation should commend them to the 
public. In the light of the present financial relations 
question might be raised as to whether borrowings 



170 THE BANK AND THE TREASURY 

of this kind should not be used as a reason why the 
public should seek another institution for current 
credit accommodations. The conclusions just an- 
nounced do not mean that the practices on the part 
of the Government of loaning to the banks by " is- 
sues" and by " deposits" may not be used to great 

advantage, and that this advantage 
Possibilities in , -, -, •, ,, . 

these practices ma y . not be mu tual. Such a result is 
possible, provided the practice is sub- 
ject to regulation which will prevent the loan from 
weakening the institution of commercial-credit. To 
accomplish such results and to secure the advantage 
referred to, however, the Treasury-deposit to the 
bank must be properly considered as a loan from the 
Government to the bank, which is made under such 
conditions only as to provide a market in which the 
banks may obtain money by hypothecation of capi- 
tal-resources at a fair market rate, when otherwise 
in the open market they might be forced to pay rates 
which would force a curtailment of commercial ac- 
commodations. 



Chapter XIII 

ADVANTAGES OF NATIONAL BANKS OVER STATE AND 

PRIVATE BANKS UNDER THE PRESENT 

PRACTICE 

Other conditions being equal there are two ways 
only, under the present practice, by which a National 
bank may enjoy an advantage over private and State 
banks: The first advantage lies in the possible in- 
creased income to be obtained from 
Two advantages -. j j , . r ,, . ,, 

enjoyed bonds used as a basis for "issues ; 

the second advantage lies in the pos- 
sible increased income to be derived from "Govern- 
ment deposits." At the ruling market prices and 
the present rate of interest receivable, the possibility 
of obtaining an increased return on investments in 
Government-bonds without the issue-privilege is 
small, if not wholly lacking. A statement of the net 
investment-return on bonds as computed by the 
Government Actuary is as follows: 

Investment-Return stated in Dollars per Hundred based on January 
Prices, 1895-1902 

5s of 1904 4s of 1907 4s of 1925 3s of 1918 2s of 1930 

1895 $3.01 $2.76 

1896 3.29 3.01 $3.21 - - 

1897 2.88 2.71 2.91 - - 

1898 2.55 2.33 2.55 

1899 2.45 2.32 2.48 $2.54 - 

1900 1.81 1.91 2.25 1.75 $1.85 

1901 1. 18 1.69 2.04 i„58 1.75 

1902 1.67 1.72 1.90 1. J .6529 

[171] 



172 THE BANK AND THE TREASURY 

Assuming that all of the Government-bonds held 
by a National bank are hypothecated for issues, and 
that "par value' ' be received in notes, these notes 

"Issues" com- mav then be Usec ^ by tne bank as 
pared with legal- money. They may not, however, be 
tender reserves counted legaUy as a part of the re . 

serve. If the notes are used to purchase "commer- 
cial paper" then the bank may not purchase more 
"paper" than it has notes, whereas an equal amount 
of legal-tender money held in reserve to support 
credit-accounts (deposits) would permit the bank to 
buy from two to four times as much of the commer- 
cial paper offered by customers (depositors). Such 
a use of the notes would therefore cause the bank to 
do business at a loss. 

The bank, however, may make the notes available 
for the highest banking return by paying them out in 
response to money-demands (as for example in set- 
tlement of balances due to distant banks) and hold 

the legal-tender money received as 
Elements of gain ,, » mi • j • v. .1 

and loss reserves." This device permits the 

National banks to avoid the disability 
attaching to the "notes," which prevents the "notes" 
from being held as reserves, but for the same reason 
forces the bank-note into general circulation to sup- 
plant the legal-tender holdings. Assuming that the 
bank in question succeeds in thus exchanging its 
entire "issue" for legal-tenders, then the only dis- 
ability which it suffers is the tying up of the amount 



ADVANTAGES OF NATIONAL OVER STATE BANKS 173 

of its capital represented by the " margins," i.e., by 
the " premiums," the "five per cent fund with the 
Treasury," etc. With these two factors alone to be 
considered, then, if the investment return on the 
bonds were two per cent, and the " margin," including 
the " premiums" and the "five per cent fund," were 
ten dollars per hundred (and if again it be assumed 
that one dollar in reserve will support four dollars of 
credit-accounts, and that the rate of interest in com- 
mercial loans were five per cent), then the margin of 
income lost to the business on account of capital 
invested in "margins" would equal two per cent or 
exactly the same amount as the income realized on 
the bonds. Under such circumstances the advantage 
to the National bank would be nil. 

The same conclusion may be drawn from the 
computations of the Government Actuary found on 
page 33 of the Comptroller's Report, 1902. In this 
it is assumed that the notes may be invested at the 
rate of six per cent, and on this assumption the result 
exhibited is as follows: 

2s of 1930 $6.62 per $100 

3s of 1903 6.16 per 100 

4s of 1907 6.19 per 100 

4s of 1925 5.94 per ioo 

5s of 1904 5 .96 per 100 

Such a result does not show any considerable ad- 
Advantage small vantage from "bond investment and 
under present issue" as it would not be logical to 
practce assume that the "note" may be in- 

vested at any higher rate than could the "legal-tender 



174 THE BANK AND THE TREASURY 

money' ' used to purchase the bond. Assuming that 
the note may be used with equal advantage, however, 
in the above showing, there would be a fraction of 
one per cent of profit on three classes of bond invest- 
ments, and a fraction of one per cent of net loss on two 
others represented. 

In this result, however, the assumption is that the 
"note" is as useful to the banker as are gold certifi- 
cates or other forms of money. If this be an over- 
statement, then there may be, in truth, a loss to the 
bank on every class of bonds which is here made the 
basis for actuarial calculation. To say the least, the 
margin of net profit in " issue" is, in the judgment 

of bankers, so small that few have 

Possibilities of a M ■, , , ■, e .■» 

l oss ' ever availed themselves of the maxi- 

mum issue privilege. Quoting from 
Mr. Ridgely, in an address delivered on the evening 
of December 18, 1903, at a banquet given by the 
New York State Bankers' Association: "In the Re- 
port of the Comptroller of the Currency just made 
there is given a table showing the percentage of the 
issues outstanding to permissible circulation, from 
1863 to 1902. The maximum of 81.6 per cent was 
reached in 1882, and the minimum of 44.1 per cent 
in 1892, and since the Act of 1900 it has been a little 
over 50 per cent, now being 53.32 per cent. It is 
hard to figure now whether there is any profit at all, 
as it depends upon the amount of notes which can 
be outstanding and the prices of bonds. On circu- 



ADVANTAGES OF NATIONAL OVER STATE BANKS 175 

lation based on some classes of bonds there is a 
positive loss." 

In the foregoing discussion the assumption has 
been that the banks which receive " issues" from the 
Government have desired to keep them outstanding, 
and the present practice conforms to the assumption 
made. When this is done, however, the question of 
advantage or disadvantage of "issue "-privilege must 
be considered as pertaining to a use of " issues" in 
lieu of " credit-accounts," for the purchase of legal 
" cash "-reserves. In the first case, there would be a 
"Notes" com- positive loss in that the capital of the 
pared with " de- bank could not be used for banking 
t ostts purposes; in the second case, the in- 

creased income from bonds would not more than 
compensate for the margin of capital which is made 
unavailable — being invested in "margins." The 
point here made is, that viewed in the light of present 
practices (i.e., looking upon the issues as a form of 
funds to be currently used as a part of the permanent 
money stock) the issue-privilege is of little or no 
advantage to the National bank, and in certain cir- 
cumstances may stand in the way of obtaining the 
best business results. 

Advantages in the " Government Deposit" Privilege 

The second special privilege accorded to the Na- 
tional bank by the Government (viz., the privilege of 
hypothecating invested capital-resources, or "gilt- 



176 THE BANK AND THE TREASURY 

edge" securities, for Government loans) presents a 

somewhat more alluring prospect. By such an 

arrangement, under present practice, the money 

surplus of the Treasury is looked upon as a prize to 

be taken for the use of banks as " reserves" without 

the payment of interest, in exchange for demand 

obligations against which no "reserve" need be kept. 

The advantage in this is two-fold: (i) The money 

received from the Government does 
Elements of ad- , n- , , -, * j . i_ M . . , j 

vantage not s ™ er the legal disability placed 

on " issues." It is in the form of gold 
or demand obligations of the Government (credit- 
money) payable in gold. (2) It is procured at a less 
expense than "issues," not being subject to a tax, 
and being relieved from the cost of plates, from 
maintenance of a redemption fund, etc. Assuming 
that the amount invested in bonds is a part of the 
capital which would be permanently needed for 
"cash-reserves," and that the bonds were hypothe- 
cated, then the money obtained from the Govern- 
ment could be used to the same advantage as if it 
had not been invested in the bonds. The bank, 
however, would be required to use more capital to 
obtain the amount necessary for current redemptions. 
The only elements to be considered in estimating 
profit or loss in the practice could be found in the 
capital-return on the bonds and the amount of bank- 
ing capital tied up in "margins." In this there 
might be a small advantage over the "issue." But 



ADVANTAGES OF NATIONAL OVER STATE BANKS 177 

assuming that the amount so invested in bonds were 
a part of the " in vested-reserve " (i.e., the capital 
surplus over and above the permanent cash require- 
ments), then the money obtained from the Govern- 
ment might again be re-invested to the same advan- 
tage as if no bonds had been purchased. Assuming 
that the margin were ten per cent and that the net 
return on the bonds were two per cent, the bank 
would obtain twenty per cent on the amount invested 
in the margin. 

Reasons why the "Deposit-Loan" Privilege is more 
Advantageous than the "Issue-Loan" Privilege 

It is not in this character of items, however, that 
the large advantage lies. The practice of the Gov- 
ernment being to make "deposit- 

" Deposit-loans" -, ,, , -, . . 

in emergency loans onl y when emergencies arise, 

the National bank has a Government 
fund at hand to which it may apply for cash in time 
of greatest need. This practice is sustained by the 
history of nearly every financial stringency since the 
establishment of the National banking system, when 
the Government was in a financial condition to lend 
aid. During the period of forced liquidation from 
1 90 1 to 1903 the aid lent by the Government to the 
National banks was the most striking single feature 
in giving support to the money market. An addition 
of over $100,000,000 to the money-reserves of Na- 
tional banks by transfer from the Treasury within 



178 THE BANK AND THE TREASURY 

a few months went far toward preventing a wholesale 
collapse in the overstrained credit of commercial 
banks, while they were slowly applying pressure to 
those who had obtained credit-accounts in exchange 
for collateral loans. 

A private bank or a State bank in time of financial 
stress must look to the market for funds. To obtain 
money with which to maintain its credit-accounts, 
without curtailing loans to customers, it must convert 
some of its capital-assets. This may be done either 
by sale or by hypothecation. If by sale, then the 
bank must take the market price for securities, and 
on an unfavorable market must suffer an investment 
loss. If by hypothecation, then the bank must pay 
the market rate for money. The National bank, on 

Advantage of the other hand > if [t has "gilt-edge" 

" emergency " loans securities " reserved," may obtain 
without interest funds frQm ^ Government by hy _ 

pothecation free of charge — i.e., without payment 
of any interest at all. To illustrate this advantage: 
Let us suppose that the market for securities is five 
per cent below the price paid by the bank. To sell 
capital-resources under such conditions would entail 
a direct investment loss of five dollars per hundred. 
Again let us suppose that the market rate for money 
has risen to ten per cent in the market, then this 
extraordinary rate must be paid on hypothecation. 
Either circumstance would put the State bank or 
private bank at a disadvantage in competition with 



ADVANTAGES OF NATIONAL OVER STATE BANKS 179 

the National bank, which may obtain "issues" or 
"deposits" from the Government on hypothecation 
of its investments. 

The "issue-privilege" might be used with the 
same advantage as the "deposit-privilege" if the 
banks chose so to do. The difference lies in the 
practice of the Government rather than in the nature 
of the right. The "deposit-loan" privilege has been 
"Issues not an opportunity extended for the con- 
loaned in emer- version of " invested-reserves " or re- 
gency serve capital-resources in time of 

emergency, thus seeming to increase the banking 
power; the "issue "-privilege is an opportunity to use 
"money-reserves" for direct investment, which seems 
to permanently increase the money stock without 
adding anything to the banking power. This con- 
clusion is drawn from present practice under the 
National Bank Act, and does not reflect on the pos- 
sibilities of using both privileges to a much better 
result. 



Chapter XIV 

THE AMOUNT OF MONEY AND CREDIT FOR WHICH 
ELASTICITY SHOULD BE PROVIDED 

An essay on elasticity and sound banking would 
be without bearing if it failed to consider the amount 
of fluctuations and demands for current funds. And 
such a consideration, to be of value, must have 
reference to commercial and financial experience, 
rather than to arbitrary conjecture. The current 
funds for which demands are made in business are 
of two kinds, viz., money and credit. Each of these 
has its own peculiar history and importance. Of 
fluctuations in total money-demands the statistics 
published by the Department of the Treasury are 
the best record. 

Fluctuations in Total Money Supply and 
Demands of the Country 

The general money supply is increased or de- 
Variations in creased by coinage and redemption, 
total national by importation and exportation. Aside 
money-demands frQm ^^ ^ factorg of yariation 

are comparatively insignificant. From the Treasury 
statistics it is found that the greatest variation 

[180] 



AMOUNT OF ELASTICITY REQUIRED 181 

within a period of a single year since 1890, allowing 
for the average rate of increase, is about $244,000,- 
000, or about ten per cent of the National money 
supply. It would seem that the fluctuation in total 
money supply of the country is not a serious matter 
— that the increasing and decreasing need of the 
future, as in the past, may readily be met through 
present agencies of coinage, issue, and importation 
without seriously disturbing the world's markets. 

But the fluctuations in total National money-de- 
mand with respect to total money supply are not as 
significant as are the variations of supply and demand 
with respect to the several financial groups and insti- 
tutions of which the National system is composed. 
This is true for the reason that within the National 
group specific variations of much larger proportions 
Greater impor- ma y be completely lost sight of. For 
tance of variations example : Within a period of a year the 
™p«*ficdemand TreaS ury may show a monetary loss 
of $250,000,000, while the bank-reserves may show 
a gain of equal amount. These fluctuations would 
not in any manner affect the total money supply of 
the country. Again, the banks might lose $250,000,- 
000 from their reserves and the money in circulation 
among the people might increase in like amount. 
Such fluctuations would be lost sight of in an exhibit 
of National money supply and demand. Each year 
just such fluctuations as these rise like a spectre be- 
fore thoughtful bankers. 



182 THE BANK AND THE TREASURY 

As between the several financial groups there are 
three separate inquiries: (i) What are the fluctuations 
in the money-demands made by the Federal Govern- 
ment and by the several State treasuries; (2) what 
are the fluctuations in money-demands made by 
banks for money-reserves with which to support their 
credit-accounts; and (3) what are the fluctuations in 
the demands among the people for 

TiLYee rld*iS£S of 

specific demands "till-cash" and "pocket-change," etc. 
As to these several classes of fluctua- 
tions in demand we may never have complete data. 
Fortunately, however, we have reports and statistics 
from which a safe approximation may be reached. 
The Bureau of Statistics of the Department of Com- 
merce and Labor furnishes monthly statements of 
changes in the money supply in the Treasury and in 
circulation. Five times per year the Comptroller of 
the Currency makes public the changes in National 
bank-reserves ; several inquiries have also been made 
with reference to the daily averages of deposits and 
withdrawals of National banks by months ; the State 
banking and fiscal reports furnish supplementary 
evidence for different sections. 

Fluctuations in Demands on the Treasury 

Giving consideration first to the demands of the 
Treasury, the widest variation from the average in- 
crease in fiscal needs during the last fifteen years has 
been about $160,000,000. This amount is well 



AMOUNT OF ELASTICITY REQUIRED 183 

within the customary money balance carried. But 
assuming, as now happens, that money-demands on 
the Treasury may increase, at a time when the reve- 
nues are decreasing, this customary balance may be 
threatened with extinction. Nevertheless, the prob- 
lem of adjustment of Treasury resources to Treasury 
needs is not in itself a factor disturbing to business. 
Through the ample loan-power of the Treasurer, 
money may be obtained by importation at any time 
that a money surplus in the vaults of the banks is not 
available to the Government. It is only when the 
American money rate is low, when the money stock 
of private institutions is so large that they can afford 
to sell at rates far below the usual commercial rate, 
that the fiscal needs of the Treasury will be supplied 
from the banks. In other words, when the Govern- 
ment is forced on the world's market to obtain funds 
for its own needs, importation will serve to strengthen 
the National money situation. When loans are 

Fiscal transac- taken by our own people, such invest- 

tions have little ments serye t deter specu i at } ve ex _ 
bearing on etas- u ^ 

tkity cesses coincident with a large private 

surplus. The monetary disturbances that in the 
past have arisen from Treasury needs have been 
due to threatened attack on the financial integ- 
rity of credit-money- issues of the Government or 
to the calling in of loans previously made by the 
Treasury to the banks. The purely fiscal trans- 
actions of the Government have served to strengthen, 



184 THE BANK AND THE TREASURY 

rather than to weaken, our institutions of private- 
credit. 

The popular notion that the money in the vaults 
of the Government is abstracted from the money 
stock of the country is erroneous. Assuming that 
$150,000,000 were the average reserve carried in the 
general fund of the Federal Treasury, and that 
$100,000,000 were the average money-reserve carried 
in the vaults of State and local treasuries, this aver- 
age reserve amounting to $250,000,000 would be 
taken, not out of the money stock available for busi- 
ness use in the United States, but out of the money 
stock of the world. If originally the Treasury re- 
serves had suddenly been abstracted from the money 
Notion that Treas- circulation of the United States, it 
ury funds reduce na- would, by business necessity, soon 
tion's stock in trade hecQme equalized by importation; 

and after an equilibrium had thus been established 
this reserve would no longer be a factor in the money 
market. Only the fluctuations or variations in this 
Treasury reserve would ever reach the exchanges. 
An increase in Treasury reserves without importation 
would operate to decrease the supply for other pur- 
poses. Conversely, a decrease in fiscal money sup- 
plies without exportation would operate to increase 
the money supply of the country which is outside of 
the Treasury. The effect of this increase or de- 
crease, it is true, would first be felt by persons or 
institutions of first contact, but should the amount 



AMOUNT OF ELASTICITY REQUIRED 185 

of increase or decrease affect the funding needs of 
these persons or institutions of first contact, the de- 
mand or supply would at once be passed on through 
the market, and the equilibrium again restored. 

Fluctuations in the Money-Demands oj the Banks 
and of the People 

From the point of view of elasticity the only money- 
demands that are serious, and therefore the principal 
ones to be considered, are those made by the banks 
as a means of supporting their own credit-accounts, 
and those made by the people for "till-cash" and for 
" change," etc. These two demands may be treated 
as practically the same, since the method by which 
money is obtained by the people is directly or indi- 
rectly to draw on the banks. The purpose of selling 
commercial paper or other bankable assets to a bank 

The chief fludua- is to obtain a current fund for use in 
tions in money- business. Under ordinary circum- 
demands of banks stances ft customer prefers these funds 

in the form of a bank-account. But when occasion 
requires the bank may be asked by the customer to 
pay its account, and thus money is withdrawn from 
the bank- reserve. The banks stand in the position 
of a money market to the people. The banking 
business is one of selling money " short" and then 
making delivery "on demand." It is through the 
process of making deliveries on "short sales" of 
money by the banks that the reserves are depleted. 



186 THE BANK AND THE TREASURY 

The largest fluctuation from the average increase 

or decrease of money-reserves of National banks 

recorded during the last fifteen years is about $155,- 

000,000. This was under circumstances of extreme 

monetary disturbance, and a general condition of 

doubt, which in many localities amounted to actual 

Amount oj elas- panic. Assuming that this amount 
ticity needed in r • 1 , ,1 • n 

bank money-re- fairl y represents the maximum fluc- 

serves tuations in money-demands on other 

banking institutions proportionate to their capitali- 
zation (and the assumption would seem a conserva- 
tive one since the National banks are depositories for 
private banks, State banks, and trust companies), the 
extreme fluctuation in money-demands made by all 
banking institutions would not exceed $375,000,000. 
This may be taken as the degree of elasticity needed 
in the money circulation to meet the money-demands 
of banks, and, through the banks, to meet the 
money-demands of the public. 

Fluctuations in Demands for Credit-Funds 

Turning to the question of elasticity for which 
provision is to be made in the other form of current 
funds used by the business community (viz., bank- 
accounts), the same process of reasoning may be 
followed. Taking the statistics of National banks 
five times per year as a basis for calculation, the 
largest variation in average decrease or increase 
within fifteen years has been about $875,000,000, or 



AMOUNT OF ELASTICITY REQUIRED 187 

about fifteen per cent of the average amount of active 
bank-credit at the time outstanding. 

Using another basis for calculation of the extreme 
possibilities of fluctuations in demands for credit- 
accommodations which may be sought by the busi- 
ness community, the statistics of daily averages of 
deposits and withdrawals may be invoked. From 
the investigation made in 1903, it would appear that 
the average daily demand on National banks is about 
$226,000,000, and that this average daily demand 
fluctuated by months from $258,000,000 to $200,- 
000,000. In other words, from the month of Jan- 
Computation uarv to the month of August there was 
from daily a fluctuation in daily averages of about 

averages $60,000,000. It also appears that the 

total amount of funds provided in the form of bank- 
accounts changed hands on the average about once 
in fifteen days — that is, that the average length of 
time for which the business man provides current 
funds needful to his business is about half a month. 
Assuming that $60,000,000 is a maximum fluctuation 
in daily demands on National banks for credit-ac- 
commodation, and, further, that the active accounts 
of all commercial banking institutions is about 
$9,000,000,000; assuming again that the credit fluc- 
tuations in other institutions are in like proportion to 
those of National banks, and that the average period 
for which credit-accommodation is asked is fifteen 
days; assuming further that this gross fluctuation in 



188 THE BANK AND THE TREASURY 

demand fell within the period of average loans, in- 
stead of within a period of a year, then the maximum 
fluctuation in demands for credit-accommodations 
would rise to $1,800,000,000 or about twenty per cent 
of the active accounts outstanding. This would 
seem an extreme estimate as to the elasticity required 
under conditions most favorable to credit expansion. 
Using the foregoing conclusions as a basis for 
determining the amount of elasticity actually needed 
to date, it would seem that the preparation to be 
made for response to fluctuating demands for money 
by banks amounts to about $400,000,000 — i.e., 
that provision for an emergency currency of about 
thirty per cent of the National bank capitalization 

would be adequate to meet every fluc- 
Total elasticity , , . i 1 ..-l j. • 

required tuating money-demand without im- 

portation or high market rates. By 
the same criterion it would seem that the banks 
should provide for an increasing and decreasing 
credit fluctuation of from $1,000,000,000 to $2,000,- 
000,000, or from ten to twenty per cent of the 
average volume of credit-accounts used as current 
funds. 

How Fluctuating Demands Affect the Present 

System 

Before reaching conclusions as to the manner in 
which this fluctuating demand for money and credit 
may be met, it may also be well to trace the effect of 



AMOUNT OF ELASTICITY REQUIRED 189 

demands on our system as at present operated. This 
can best be done by means of charts, which at a 
glance will give the results of many years of ex- 
perience. Under our present practice the loan to 
reserve agents, or the " reserve deposit," is the form 

Money-demands m wnich tne surplus money of banks 
oj the country jail is invested in time of low demand. 
on reserve banks ft ^ by ^ procesg of « calling „ these 

reserve loans that the investing bank expects to re- 
store to itself the funds loaned in time of money need. 
On Chart V is represented the money-demands made 
on all National banks of the United States by their 
customers, and also the demands made by investing 
banks on reserve agents. From this it conclusively 
appears that the demand for money made by cus- 
tomers on all of the many banks of the United States 
finally falls on the reserve agents — that is, through 
our peculiar system of investment of capital surplus 
all of the fluctuations in money-demands of the 
people fall on a few banks. 

Another fact quite as conclusively appears from 
Chart VI, opposite page 70, viz., that the demands 
made on reserve agents finally fall on the banks 
The demands on of the city of New York. Trac- 
ZhThfdlm ™% the fluctuations on this chart it 
New York will appear that every variation in 

money-reserves held by banks of the country at large 
finds a similar variation in New York City banks. 
That this may the more surely be traced to the 



190 THE BANK AND THE TREASURY 



" reserve" system, another chart is prepared (page 
134), which shows the " amount due from all reserve 
agents' ' and the " amount due from New York City 
banks." The experience here recorded leaves no 
question but that the avenue through which money- 
demands reach New York is the " reserve bank." 

Another clue to the situation is found in Chart 
VIII, opposite page 152. From this it seems that the 
amount due from New York banks to other banks, 
in every fluctuating detail, is almost exactly the 
amount of " money-reserves" kept by the banks of 
New York to support their own credit-accounts. 
The borrowed That monetary disturbance would 
money-reserves of occur under such circumstances is a 
New York banks condusion which might be reached 

by conjecture; that monetary disturbances have 
actually occurred is a matter of history and expe- 
rience. The record of the past and the evidences 
here presented can leave no doubt of the fact that 
under the present practice of investing capital-re- 
serves in loans of other banks, every monetary de- 
mand falls directly on the banking centre and tends 
to throw the whole commercial-credit system into a 
condition of unrest — a condition which at times 
deprives outside banks of the support of central 
banks, and, again, forces New York banks to resort 
to Clearing-House certificates for settlement of 
money-balances among themselves, — a condition of 
financial paralysis to commercial enterprise. The 



AMOUNT OF ELASTICITY REQUIRED 191 

present method of supplying money-demands, a 
method which simply shifts the demand from one 
bank to another, is one of the features to be consid- 
ered in devising ways and means to overcome present 
defects, and to give greater elasticity to the money 
medium and greater safety to banking institutions, 
without forcing the banks again to shift the fluctu- 
ating demand back to the constituency where it 
arises, thus standing in the way of extension of 
commercial accommodation when accommodation 
is needed. 

Certain other features in credit-demands may be 
developed with reference to fluctuations and methods 
of providing credit-supply. From the charts of credit- 
fluctuations (pages 184, 202) it will appear that 
quite a different practice prevails in different sections 
of the country. In the cotton and tobacco States 
fluctuations in credit-demands are as regular as the 
seasons. In manufacturing Pennsylvania the varia- 
tion by seasons is scarcely noticeable. To meet these 
local conditions quite a different method of capital 
equipment would seem to be necessary. That a 
Conditions in dif- practice prevails in the cotton States 
jerent sections to peculiar to themselves when com- 
pared with other sections would ap- 
pear from Chart X, opposite page 176. In the 
cotton and tobacco section a large portion of the 
current credit given is procured from other sections 
by means of "bills payable " and "notes re-dis- 



192 THE BANK AND THE TREASURY 

counted." The fluctuations in these two items of 
account follow the seasons of crop removal with all 
of the precision that do the credit-accounts of cus- 
tomers. In a section of variegated industry such as 
that represented for comparison, this practice does 
not prevail. On the other hand, it appears that the 
necessity for meeting periods of extraordinary fluc- 
tuation, due to industrial depression and speculative 
reaction, is very much greater, and should be brought 
into the calculation of credit strain on redemption 
equipment. 



Chapter XV 

POSSIBILITIES OF ELASTICITY UNDER OUR 
PRESENT NATIONAL BANKING SYSTEM 

Many writers have argued to the conclusion that 
under our present practice the bank-note has in 
itself no possible use as an emergency currency. 
To enlarge more fully on this position three reasons 
are urged why National bank " circulation'' may not 
be increased to relieve a monetary strain, viz.: (i) 
That in time of ordinary money-demand the com- 
Reasons assigned mercial constituency do not wish 
for inelasticity in bank-notes for use in their business 
to any greater extent than they al- 
ready use them; if they did wish more notes it is 
affirmed they would call for them at the bank in 
exchange for commercial paper or other bankable 
assets sold, instead of opening bank-accounts. In 
so far as note-issues are increased, therefore, the in- 
crease is in the nature of a substitution for other 
forms of money circulation. (2) That in time of 
extraordinary money-demand under the present prac- 
tice, the bank has no power to extend either its money 
or its credit-accounts to meet the enlarged business 
need for current funds; the bank must literally buy 

[193] 



194 THE BANK AND THE TREASURY 

its " notes" from the Government before issuing 
them; moreover, the " notes" must be purchased by 
use of the bank's credit, collaterally secured by 
United States bonds on hand and other collaterals, 
and these collaterals will cost them more than the 
amount, in " notes," realized; the bank which is in 
straits for legal-tender money, therefore, has no 
power to obtain " notes" from the Government. 
(3) That when so obtained, the notes may not be as 
effectively used as other forms of money, viz., legal- 
tender issues of the Government. 

Elasticity as an Individual Banking Problem 

The problem of elasticity to the individual bank is 
one which pertains to its own credit-accounts. Un- 
der a highly localized banking system a single insti- 
tution cannot control the money supply of the nation; 
it cannot adapt general money supply to general 
money- demand. If a bank possess powers of credit- 
note-issue to meet the demands of its own customers 
Problem one f° r money, it would to this extent be 

which pertains to able to relieve its own necessities and 
credit-accounts ^ ^ extent be Qut q£ ^ mQney 

market. But the principal money-demand made on 
a bank does not come from its customers; it comes 
from other banks. Under such a system as that sug- 
gested by the "commercial assets" school, there is 
no reason to suppose that other banks would accept 
these notes so issued in settlement of balances. Or, 



ELASTICITY POSSIBLE IN PRESENT SYSTEM 195 

if they were accepted, banking experience further 
suggests that the system itself would prove dangerous. 
Commercial- assets money-issues are safe only when 
provision is made for other banks to send issues 
"home" for payment as fast as they are received. 
When notes of other banks are promptly redeemed 
they operate in the same manner as do checks and 
drafts. 

Credit-money-issues by banks, if properly safe- 
guarded, cannot materially affect the fluctuations in 
bankers' demands, and this is the chief fluctuation in 
money-demands to be provided for. Such issues 
may have the effect of supplanting the stable and 
"Issues" cannot constant money supply issued by the 
supply chief Government which is now used for 
money-demand ^ cash „ and « pocket change .» 

That is to say, bank-issues might operate to drive 
gold, silver, and Government-notes out of circulation, 
but could not supply the demand made by one bank 
against another. As near as may be estimated from 
statistics at hand, the constant money-demand for 
"till cash" and for personal uses is at present about 
$1,600,000,000, or 60 per cent of the money out- 
side of the Treasury. This stable or permanent 
circulation might be supplied by the credit-note- 
issues of the bank, but to make such a circula- 
tion sound it would be necessary for the banks to 
increase their capitalization to carry the credit- 
money-load which is now on the Treasury — a charge 



196 THE BANK AND THE TREASURY 

on capital equal to about fifty per cent of the present 
redemption equipment of National banks. 

The possibility of the individual bank solving its 
own problem of elasticity in credit-accounts under 
the present Law, however, is not wanting. This 
may be done through adequate capitalization and 
adequate redemption equipment. As before indi- 
cated, the only limitation to the amount of credit- 
Individual bank accounts that a bank may carry is to 

TcUyZ^r^ f0Und in itS unim P aired ca P ital ; 
accounts the only limitation to the possible 

elasticity in the credit-accounts of such an institution 
is to be found in the amount of redemption equip- 
ment which it provides for itself. If the minimum 
of credit-accounts demanded by its customers is 
$500,000 (assuming that twenty-five per cent is an 
adequate cash-reserve to meet all demands on its 
current obligations), then the minimum capital sup- 
port required would be $125,000. If the maxi- 
mum demand from customers for credit-accounts is 
$1,000,000, then, under the same assumption, the 
maximum capital requirement would be $250,000. 
But in order to make possible this $500,000 expansion 
of credit- accommodations the bank should be capi- 
talized to meet the maximum redemption require- 
ment. 

Assuming again that all the redemption equipment 
were invested, except such portion as is necessary to 
be carried in cash as a twenty-five per cent money- 



ELASTICITY POSSIBLE IN PRESENT SYSTEM 197 

reserve to support credit-accounts outstanding, then 
when the demand for customers' accounts is at a 
Power of expand- minimum the bank, if capitalized at 
ing credit in its $250,000, would have $125,000 of its 
own hands capital invested and temporarily held 

as an income-producing asset awaiting an increase in 
money and credit-demands. The only question in 
determining ability to expand accounts to meet in- 
creased wants of customers would be in the character 
of these capital reserve-investments held — that is, 
a question as to their immediate convertibility into 
cash. Should it at any time appear that a bank were 
unable to meet demands for current credit-accounts 
or for cash, this inability would arise from one of two 
occasions: (1) a too small capitalization, or (2) an 
unwise investment of surplus capital for purposes of 
redemption reserves. 

Possibilities of Elasticity in the National Banking Sys- 
tem as a Whole, without Change in the Present Law 

The possibility for elasticity in the National bank- 
ing system as a whole under the present Law differs 
from that of the individual bank in this, — that a 
system of banking such as the National banking 
May give elas- system, including within it over 6,500 
ticity to money different banking institutions, makes 
possible a degree of elasticity in the 
money circulation adequate to meet the fluctuating 
money-demands of the nation, as well as a degree of 



198 THE BANK AND THE TREASURY 

elasticity in the credit-accounts of individual banks 
sufficient to meet demands of customers. While one 
bank, with its comparatively insignificant capitaliza- 
tion, can do little to affect the money market, 6,500 
banks can do much. Under the present Law the 
possibility for money expansion and contraction to 
meet commercial demands lies (1) in the "issue- 
privilege" and (2) in the provision made for Govern- 
ment " deposits." The National banks alone enjoy 
these privileges. The " issue" powers not only give 
to National banks increased facility for the conver- 
sion of their invested redemption equipment into 
cash by hypothecation, but also furnish a method 
under the present Law whereby an increase in the 
money circulation of the country may be effected 
without importation and without disturbance of the 
money-funds of the National Treasury. 

But such a result may be attained only by cooper- 
ration on the part of the many banks of the system 
by which the various individual institutions making 
up the system would refrain from hypothecating 
their bonds in time of minimum money and credit- 
demands, and would hold them as an unencumbered 
capital-investment ready for hypothecation when 
Amount 0} etas- money-demands might increase. The 
ticity which may amount of fluctuation in the money- 
be given demands made on National banks 

has never exceeded $200,000,000. The total amount 
of bonds owned by National banks, July, 1904, 



ELASTICITY POSSIBLE IN PRESENT SYSTEM 199 

was over $650,000,000. The total fluctuating 
money-demands of the entire country has never ex- 
ceeded $300,000,000. If the capital invested in 
bonds by National banks alone were used for the 
purpose of supporting the fluctuating banking and 
business demand for money, instead of being em- 
ployed as a means of supporting the bond market 
and for increasing the permanent money supply of the 
country, this capital investment would be adequate to 
meet every need for elasticity in the money medium. 
The elasticity thus given to the money circulation 
would be in response to money-demands made 
through the banks. In other words, the elasticity 
would be provided through those institutions upon 
which demands were made. Such a practice would 
supply the -fluctuating banker's needs for money as a 
means for payment on credit-accounts, as well as the 
■fluctuating popular demand for " change" and for 
other personal payments, which give rise to drafts on 
the bank. This adaptation of money-supply to 
May give elas- money-demand would be in direct 
ticity to credit- support of expanding credit-accounts 
' un s of banks, and this use of capital in- 

vestments in bonds owned by banks would admit of 
a sudden increase or decrease in credit transactions 
during a period of fluctuating demand of at least 
$1,600,000,000, while the greatest fluctuation from 
the average of accounts of National banks during the 
last fifteen years has been only $350,000,000. 



200 THE BANK AND THE TREASURY 

How the Credit- Accounts oj National Banks may be 

made Elastic under the Present Law without the 

Use oj the Issue-Privilege 

The possibility for elasticity through issues is 
quite equalled by the possibility for elasticity with- 
out issues. The difference is this, that the issue- 
privilege makes possible elasticity of the money cir- 
culation as well as credit accommodations without 
importation and without disturbance of the resources 
Elasticity without of tne Treasury, while the elasticity 
issues limited to provided for under the Law without 
credit-accounts { ^^ ordinarily would involve a 

drawing down of Treasury resources and possibly 
an importation of gold. The second possibility of 
increasing elasticity lies in the privilege before dis- 
cussed — the privilege granted to the National banks 
to receive " deposits" from the Government upon 
the hypothecation of securities acceptable to the 
Treasurer. The deposit- (loan) -privilege is accorded 
to National banks as a means of making the Treasury 
surplus available to them for money-reserves in time 
of need. It is a happy supplement of the issue- 
(loan) -privilege. 

This provision of law under the recent decision of 
the Treasurer allows the banks to hypothecate not 
only United States bonds on hand, but also other 
" gilt-edge" securities, discretion as to the advances 
to be made being left with the Secretary. By a 



ELASTICITY POSSIBLE IN PRESENT SYSTEM 201 

proper use of this privilege elasticity may be given to 
the credit-accounts of banks and much relief may be 
afforded to the community seeking accommodation. 
Such a use of the deposit- (loan)-privilege has in it 
Attainable with- tne possibility under favorable con- 
out disturbing the ditions of making practically all the 
mone y ' surplus capital-resources of banks 

(that may have been conservatively invested) im- 
mediately convertible into cash, by hypothecation, 
when cash is needed to keep up the lawful money- 
reserve of banks, which in turn may be used to in- 
crease credit-accommodations. By such a practice 
the entire money surplus of the United States Treas- 
ury might be used as a subsidiary money-reserve to 
the money-reserves of commercial banks. This 
added facility for immediate conversion of invest- 
ments into cash has its chief significance in the fact 
that, while money may be withdrawn from the 
Treasury (at such times as the Treasury may have 
a surplus available) the credit- accounts of banks may 
be expanded and adequate support may be given 
to them in money-reserves without appeal to the 
money market and without disturbance of money 
rates. 

There may be, however, few conditions favorable 
to the use of the Government deposit (loan). The 
hypothecation of investments with the Government 
as security for these loans (sales of money by the 
Government to the banks) depends upon the coinci- 



202 THE BANK AND THE TREASURY 

dence of a disposable Treasury surplus with a bank- 
er's pressing need. It has happened that during 
the years 1898 to 1902, with foreign importations 
increasing faster than Government expenditures, the 
Government had a surplus of money in its vaults 
which was available to the banks without serious 
Conditions under inconvenience to the Treasury; 1903 
which this would and 1904 found other conditions preva- 
not obtain fent ^ ^ National capitoL The 

same has been true of every period of trade reaction 
and financial retraction. 

When tariffs have been lowered or the American 
commodity market has been less favorable to impor- 
tation, the Government has not had a large loanable 
money surplus. In fact, it has usually happened 
that during such periods of depression the Govern- 
ment has not been in a condition to lend a helping 
hand to private institutions. The situation has oft- 

Conditions under times been reversed. Deposits or 
which disturb- , , 1,111 

ances would be loans previously made to the banks 

increased must be recalled as a means of meet- 

ing the deficit created by the excess of expenditures 
over receipts. Owing to this fact, under the present 
practice the loan-deposit has proved a somewhat 
dangerous device. Under any circumstances, the 
possibility of gaining support from the Government 
is highly contingent and not to be permanently re- 
lied on as a safeguard against inelasticity. At 
best it must be treated as an auxiliary support, but 







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ELASTICITY POSSIBLE IN PRESENT SYSTEM 203 

nevertheless, at such times as it may be used, it 
may be one of the most efficient supports to credit 
conceivable. 

Possibility under the Present Law oj Increasing 

Elasticity oj both the Money Circulation and 

of Credit-Accounts through the Loan Market 

There is under the present system a third possi- 
bility of making capital assets in the form of redemp- 
tion equipment immediately convertible into cash 
without forcing a contraction of commercial accom- 
modations. This possibility lies in the practice of 
so using the invested-reserve as to make it an instru- 
ment of immediate conversion in the loan market 
itself. The general loan market is the third resort 
for a National bank, but it is available to all banks 
and persons doing a banking business. A bank 
which finds its money-reserves running low may 
obtain relief from other banks in the community by 
hypothecation or by sale, unless these other banks 

Elasticity through are under similar constraint, in which 
convertible invest- case banking relief must come from 
outside. The condition precedent to 
such a use of the money market, with its powers of 
money importation, is an adequate unencumbered 
invested-reserve. If a bank has an adequate amount 
of " gilt-edge" capital assets it may at all times 
obtain money to support an expansion in its credit- 
accounts, whether or not it has Government "issue" 



204 THE BANK AND THE TREASURY 

and " deposit" privileges. For such an institution 
the problem of elasticity is solved. 

This elasticity may come through the employment 
of idle funds already in the community or by a 
process of money importation from the outside 
world. In a large banking community there are 
always to be found many customers of banks and 
other persons having accounts or claims against 
other financial institutions in the immediate locality 
who are willing to exchange these accounts or claims 
Possibilities ^ or good investments. The induce- 
without appeal to ment which brings out these funds 
and makes them available for cur- 
rent use is the offer of increased investment return. A 
bank which needs $50,000 in money, by offer of an 
increased rate of interest may find among its own 
customers (depositors) those who are willing to pur- 
chase $200,000 of the bank's "bills payable" or 
time-notes secured by stocks, bonds, or other avail- 
able assets, the effect of which would be not to in- 
crease its money-reserves but to reduce its outstand- 
ing credit-accounts (deposits) of customers. Such 
an adjustment would relieve the strain on its money- 
reserves without restricting its commercial-accom- 
modations. Again, through bankers or otherwise, 
the bank might find customers (depositors) of other 
institutions who were willing to purchase $50,000 of 
its "bills payable," secured by the hypothecation 
of reserve capital-investments. Such a disposition 



ELASTICITY POSSIBLE IN PRESENT SYSTEM 205 

would have the effect of giving to the bank hypoth- 
ecating its securities credit-claims against other 

institutions amounting to $50,000, 
How the market , . , . -,. 1 , 

is reached which amount might at once be trans- 

- ferred to its own vaults. This would 
put the bank in a position to support outstanding 
commercial-accommodations without calling loans. 
The great investment companies, old line insurance, 
savings banks, etc., have large current means that 
may be made available by secured loans. By similar 
process, when the domestic loan market may not 
furnish the desired money-reserve, foreign negotia- 
tions might set up a gold balance by importation. 
But any method of safely meeting money-demands 
requires an adequate unencumbered capital reserve; 
adequate support to commercial banks by the loan 
market and investment companies would require the 
discontinuance of paying interest on deposits by 
which commercial banks in ordinary time borrow all 
available funds of these institutions. 

One Obstacle in the way of Elasticity without Legal 

Enactment 

As has been suggested, the elasticity to be given to 
the circulating medium of the country, whether in the 
form of money or in the form of credit-accounts, must 
come by cooperation of the many banks of the 
National system. It is in this that the improbability 
of securing such a result as that outlined obtains. 



206 THE BANK AND THE TREASURY 

In the first place, the banks do not do business that 
way. In view of this fact, even if a majority of 
bankers were of the opinion that such a change 
might be advantageous, they would not be willing to 
alter their methods unless general cooperation were 
assured. Against a change which would have such 
a degree of uniformity as would insure the elasticity 
Voluntary co- desired is set all of the force and 
operation to this inertia of custom — a factor which 
end improbable requires the strong arm of law and 

the closest supervision of Government to overcome. 
In the second place, a very large majority of bankers 
have not this view of the case. In fact, judging from 
expressions made, many influential bankers would 
favor changes in method which would still further 
lower the percentage of capitalization required to 
business transacted. In the third place, to effect 
such cooperation in the interest of the greater elas- 
ticity needed, certain practices and collateral em- 
ployments of banking capital would have to be 
abandoned. There has been a growing tendency 
toward underwriting. The class of securities com- 
monly underwritten is not such an investment of 
capital as contributes to elasticity. There has been 
a growing tendency toward banking consolidation, 
by which the surplus capital of controlled banks is 
loaned to (deposited with) the controlling bank, 
without any increase in capital strength being 
effected through the consolidation. Investments in 



ELASTICITY POSSIBLE IN PRESENT SYSTEM 207 

the accounts of " central " banks may lend them- 
selves to the purposes of an individual bank or 
group under ordinary circumstances, but conversion 
of these investments into money to support local de- 
mands weakens the credit-support at the centre. 
Such a disposition of capital does not contribute to 
elasticity in the banking system as a whole. In fact, 
it has two effects directly opposed to elasticity and 
soundness: (i) it weakens the capitalization of "cen- 
tral" banks, and (2) it ties up the capital of the 
"depositing" bank in such a way as to render it 
difficult to bring money into the system from without 
as a means of meeting increasing demands. 



Chapter XVI 

POSSIBILITIES OF INCREASING ELASTICITY BY SIMPLE 
MODIFICATIONS OF THE PRESENT LAW 

Elasticity is the need — the problem is to supply 
it. To re-state a conclusion reached in the preceding 
chapter, the present system will admit of an adequate 
measure of elasticity if bankers were brought into 
cooperation to this end. The impelling force in the 
present practice — a practice which stands in the 
way of cooperative results — is the constant desire to 
lower capital-cost Of banking operation. This mo- 
tive must be reckoned with. It is ever-present in all 
The need for forms of business. It is the desire to 
legislation to se- obtain the largest income possible at 
cure cooperation & giyen capital _ cost and curre nt-ex- 

pense that gives point to the administrative devices 
of every institution conducted for gain. It has been 
the effort to lower cost and to increase profits (at 
times ill-directed) that has made necessary legisla- 
tion for the inspection of mines and factories, and for 
the introduction of safety appliances to the physical 
equipment of enterprise. 

The same necessity lies back of the present need 
for legislation requiring greater business safety or 

[208] 



MODIFICATIONS TO INCREASE ELASTICITY 209 

"soundness" in the redemption equipment of com- 
mercial banks as a means of securing increased elas- 
ticity and better banking service. It is through 
compulsory legislation that a uniform practice may 
be introduced. Under circumstances of competi- 
To benefit the tion > reforms which require an in- 
bank as well as crease in capital-cost can be attained 
the public in nQ Qther way> The drift of the 

banking legislation of the past has been toward the 
imposition of requirements that will bring to the 
public protection against insolvency of individual 
banks. The demand of to-day is protection against 
the forced contraction of accommodation by the 
banks as a means of protecting their own expanded 
credit. And as past legislation must be recognized 
as of advantage to the banker as well as to the 
public, the same result may be predicated of a fur- 
ther evolution of our system of commercial credit 
to adapt it to the increased needs for a more sound 
and a more elastic medium of exchange. 

Changes in the Law to Increase the Soundness of 

Credit-Accounts 

In the many plans proposed for increasing the 
elasticity of bank-issues and bank-credit, the element 
of the business safety of the latter has been ignored. 
An underlying fallacy has been entertained, viz., 
that the problem of elasticity may be solved without 
increasing the financial strength of those institutions 



210 THE BANK AND THE TREASURY 

offering current credit-accounts for sale. But in- 
creased financial strength must come at a cost. 
Greater soundness of credit can be had only through 
reinforced redemption equipment for meeting the 
demands for money payment, and redemption equip- 
ment must be procured by capital investment. 
Larger and better facilities for rendering banking 
service are made possible only by means of stronger 
and improved machinery for credit support. In 
banking, as in other undertakings, experience has 
taught the lesson that without adequate capital-re- 
sources both the institution and the public may 
suffer many times more than the price of safety. 
Initial capital cost of equipment, however, must be 
met, and met by those who undertake the banking 
business. 

An Amendment o) the "Money-Reserve" Section of 

the Bank Act 

The first change in the Law looking toward in- 
creased elasticity is one which would require in- 
creased capitalization and at the same time would 
take away the inducement to invest the capital surplus 
of the bank in a comparatively weak and dangerous 
form of redemption equipment. The oft-repeated 
recommendation of Comptrollers and of financial 
writers for the repeal of those sections of the Bank 
Act which permit one bank to loan a portion of its 
capital to another at interest is here invoked — a 



MODIFICATIONS TO INCREASE ELASTICITY 211 

repeal of the clauses pertaining to "reserve deposits." 
It is unnecessary to re-state the dangerous character 
Re-statement of of this device, — that a " deposit" is 
dejects in "re- a loan; that a loan is a sale of money 
serve" law for cre fa t . ft^t the "reserve deposit" 

at best cannot be more than a capital investment, but 
too often is obtained by exchange of credit; that in 
times of money strain it shifts the burden from one 
bank to another; that such a device does not permit 
of the use of capital to effect an increase in the 
money-reserves of banks or an expansion of credit 
with safety; that it hampers the operations of the use 
of bank capital in such a manner as to make elasticity 
in money circulation and in current credit-funds of 
the nation impossible. 

A deposit with another bank for the purpose of meet- 
ing exchange balances may be properly considered a 
part of the "cash" requirement, but for obvious 
reasons it may not with public safety be considered 
Effect of prohibit- as a P art °f the ' ' in vested-reserve . " In 
ing interest on so far as a deposit with another bank 
epost s - g cQnsijgj-ej as casn , the use of capi- 

tal for the purpose of obtaining such accounts should 
be restricted to the need for redemption of exchanges ; 
this restriction may be effected through the Act by a 
prohibition restraining one bank from paying interest 
on the "deposits" (loans) of another. As has been 
before pointed out by financial writers, such a pro- 
hibition would take away the inducement to this 



£12 THE BANK AND THE TREASURY 

form of investment of capital surplus. Without an 
income inducement, a bank would carry no larger 
deposits with other banks than would actually be 
needed for an exchange base. Besides, in case a 
commercial bank were not permitted to pay interest 
on deposits, there would be no inducement for trust 
companies, savings banks, and insurance companies 
to carry large credits with them. Or, to put the 
same relation in another form, the commercial banks 
would not become borrowers of money from these 
institutions as a means of supplying themselves with 
" money-reserves " to meet ordinary demands of cus- 
tomers on credit-account. Such a complete segre- 
gation of the funds of institutions of current account, 
from investment institutions, would do much to give 
stability to general financial conditions. The in- 
vestment institutions would carry a line of short- 
time papers, to be sure, and among these short- time 
investments might be secured bills payable and re- 
discounts of commercial banks. But such a practice 
would make the current revenue of investment insti- 
tutions an auxiliary support to the commercial banks 
when support were needed, instead of making the 
commercial banks the money market as well as the 
credit market, a plan which would make the various 
investment institutions and the Treasury of the 
United States independent and prominent factors in 
the money markets, and do much to place the banks 
in a position to gain support for the credit market. 



MODIFICATIONS TO INCREASE ELASTICITY 213 

The " reserve" Law as it stands has proceeded 
from a popular misconception that a bank "deposit" 
is an amount of money owned by the depositor. 
Misconception as Tnis fallacy is made use of by banks 
to meaning of themselves in their dealings with cus- 

eposit tomers, and by customers in thinking 

about banks. A familiar instance of such use is seen 
in advertisements of the financial condition of banks 
as a means of soliciting public confidence in their 
paying ability. In almost any banking journal such 
a display as this may be found: 

THE FIRST NATIONAL BANK OF ECONOMY FALLS 

Capital $100,000 

Surplus 100,000 

Total Capital and Surplus $200,000 

Deposits $1,500,000 

The above is assumed to be a statement of financial 
strength. If the advertisement were written to 
speak the truth it would be something as follows: 

Capital and Surplus $ 200,000 

Call Loan Indebtedness 1,500,000 

Excess of Demand Indebtedness over Capital... 1,300,000 

A credit-account to a customer is a contract for the 
future delivery of money — a deal in "futures." 
The bank sells to its customers (so-called depositors) 
its contracts for the future delivery of money. These 
contracts are due on "call." They have not even 
the time usual on boards of trade and stock ex- 
changes where "puts" and "calls" are dealt in. In 



214 THE BANK AND THE TREASURY 

stock transactions a " future" is usually entitled to 
at least one day's notice before delivery is to be made. 
"Deposit" an Institutions of commercial-credit do 
investment in not reserve this privilege, and if they 
ju ures j-^ ma k e sucn reserva tion the utility 

of their credit to customers as current funds would 
be destroyed ; they would stand in the same position 
as savings institutions. The commercial bank must 
deliver at once, without notice, or admit its insol- 
vency, and with such admission sacrifice all claims 
to public confidence as a basis for future credit sales. 
After several decades of experience we established 
a law requiring banks to keep a certain minimum pro- 
portion of money-reserves to demand-credit outstand- 
ing. A prescribed ratio of "cash" to credit-accounts 
outstanding should be established — "cash" to in- 
clude both money-reserves and exchange-balances. 
It should be permitted, however, that these may be 
used for the satisfaction of immediate demands. 
Should require But the law should also require that 
cash-reserve pro- this " cash "-reserve, including money 
vided out of capital and excnange -balances, should be 
provided out of capital. It should further require 
that every subsequent increase in credit-obligations 
should be supported by "cash" provided by capital 
investment. Such an amendment would prevent an 
expansion of credit beyond ability to support it, and 
would be equivalent to saying that a bank should 
capitalize its maximum instead of its minimum 



MODIFICATIONS TO INCREASE ELASTICITY 215 

credit-redemption requirements. As a result of such 
an amendment the bank itself, to increase its own 
income, would see to it that such portion of its re- 
demption equipment as was not immediately needed, 
when credit-demands were not at a maximum, was 
invested in assets immediately convertible into cash. 
An amendment of this one feature of the Bank Act 
by repeal and by substitution of a provision author- 
izing the banks to invest their surplus capital-re- 
sources in first-class marketable securities only, to 
be accounted as an " in vested-reserve'' and to be 
considered as a part of the redemption equipment 
held as a basis for credit support, would at once add 
over $500,000,000 to the assets of National banks 
Increase in elas- available to procure money by sale 
ticity of money-re- or by hypothecation without disturb- 
serves as a result ^ ^ credit relations of other insti . 

tutions. Such a change would greatly increase the 
possibilities of credit expansion in time of need. 
This increased strength of equipment can come from 
the superiority of investments of present capital em- 
ployed as banking equipment. In every other rela- 
tion the Law has recognized the investment of one 
bank in the liabilities of another as a policy not to be 
supported. Commercial banking institutions have 
failed, and until such a change is made they always 
will fail, to support an extraordinary strain which is 
general enough to reach the central bank. The 
present reserve provisions always have operated and, 



216 THE BANK AND THE TREASURY 

under similar conditions, must operate to force a 
reduction of loans with increased money-demand. 

Moreover, such an amendment of this feature of 
the Bank Act would take out of the National banking 
system at the reserve centres over $500,000,000 of 
money that is now held there as an invested-reserve, 
but which is used by these central banks for the 
support of a much larger volume of credit represented 
Increased inde- m call-loans and other speculative 
pendence of indi- assets — a kind of security that is of 
vidual banks mh uge tQ any kind rf business that 

should be supported by commercial banking capital. 
The "call-loans" of National banks, as well as the 
call-loans of other institutions which depend on the 
money-reserves of National . banks, are speculative 
loans. These loans are usually incurred as a means 
of carrying on margin speculation. This is about 
the only kind of business to which a call-loan is 
adapted. Under the present practice the National 
bank has become the mainstay to the speculator. In 
an emergency the National bank finds itself at times 
tied hand and foot with the man whose only interests 
lie in market fluctuations instead of in producing 
goods and marketing them. When gradual liquida- 
tion may be effected the banker may protect his 
commercial constituents against the speculative 
judgments of professional traders. On the other 
hand, when the strain is sudden and danger is immi- 
nent these call-loans may not be made available to 



MODIFICATIONS TO INCREASE ELASTICITY 217 

protect commercial-credits. But even if by forcing 
liquidation the banker is able to preserve his own 
institution intact, the result is a shock to the commu- 
nity and it reacts unfavorably on commercial and 
industrial enterprise. 

Repeal of the provisions referred to would not only 
increase the elasticity of commercial-credit-accounts 
but would also purge the commercial bank of its 
most dangerous constituency. It would compel the 
speculator to seek call-loan accommodation with 
institutions and agents specially capitalized and 
equipped for such service. Such a change in the 
Would purge sys- Law would also require the conserva- 
tem of dangerous tive banker to seek other investments 
for his surplus money-reserves, and by 
this means would leave intact the capital-resources 
of commercial banks for commercial-credit support. 
It would tend to break down the practice of comming- 
ling capital assets of banks, would place each indi- 
vidual institution on a more independent footing, and 
would sever the bonds which have so frequently 
dragged all down into a common pool through the 
weakening or breaking of some central support. 
The individual banker would be banking on money- 
reserves and " gilt-edge' ' investments instead of 
basing his own credit on the credit of other banking 
institutions which in turn look to speculative or 
other customers for support in emergency — a system 
which brings the results of bank-credit over-expan- 



218 THE BANK AND THE TREASURY 

sion down on the heads of those engaged in commerce 
and industry. 

Amendment Requiring a Minimum Proportion of 
Redemption Equipment to Maximum of Credit- 
Obligations Outstanding 

An amendment directed toward adequacy in capi- 
talization would not be complete without a clause 
requiring a prescribed proportion of " redemption 
equipment" to the maximum credit-funds disposed 
of for the accommodation of customers. As a mat- 
ter of public safety a bank should not be permitted 
to incur credit-obligations in excess of a prescribed 
ratio to unimpaired capital. That is, instead of the 
money-reserve being a criterion by which to gauge the 
soundness of credit-accounts, the law should adopt the 
measure of unimpaired capital available for redemp- 
tion purposes. Such an amendment would have the 
Controlling controlling effect: (i) Of imposing on 

effect oj such an the Comptroller of the Currency the 
amendment inquiry ^ ^ whaj . ^ n Qf a bank , g 

capital is tied up in " banking-house and fixtures," 
in "real-estate," in "mortgages," and in "other in- 
vestments" not available for the support of credit- 
accounts, such as "underwriting," etc. ; (2) of making 
it the duty of the Comptroller of the Currency and of 
examiners to inquire into the amount of capitaliza- 
tion remaining after procuring "redemption equip- 
ment"; (3) of requiring a specific accounting for the 



MODIFICATIONS TO INCREASE ELASTICITY 219 

character of " redemption equipment" held — what 
portion in cash, what portion in investments — and 
as to cash, what portion is held in the form of money- 
reserves, and what portion in the form of exchange 
accounts; (4) of compelling a report in such form 
that this total redemption equipment may be com- 
pared with the maximum of credit-obligations to be 
redeemed. At present no question is raised so long 
as the money-reserve bears the prescribed proportion 
to " deposits." This money-reserve may have been 
borrowed; it may be swelled by padded or " mutual" 
balances. 

The bank's capitalization may be inadequate to 
support even the minimum of credit-accounts. No 
inquiry is made as to the character of redemption 
equipment other than cash. In fact, a Comptroller 
of the Currency has been known to say that so long 
as the loans of a bank are good there is little need for 
investigating further. A prominent banker also an- 
nounces as his belief that if the cash-reserve is kept 
intact it is of less importance to know that the "stock, 
bonds, and other securities" held are properly repre- 
sented in financial statements than that the "com- 
mercial assets" are not to be written down. These 
Need for a change opinions have in them much of truth, 
in the principle but not for the reasons assigned. It 
of con rot . g necessar y t na t i oans be good, for the 

reason that any loss on this or on any other account 
is a capital loss. There can be no other kind of loss in 



220 THE BANK AND THE TREASURY 

a going business; only an insolvent can saddle losses 
on creditors. Assuming that all the " commercial 
assets" are good, a bank having capital-assets which 
are unavailable and of questionable character (while 
it may be able to liquidate on " winding up") will not 
as a " going concern" make an efficient banking 
institution. In case the money-reserves are not pro- 
vided for out of the capital, the bank is a constant 
menace to the community. As a going concern 
every extraordinary demand will be forced on cus- 
tomers, and the community will experience a peri- 
odical restriction in funds available for current use 
such as will make commercial judgments uncertain 
and enterprise extra-hazardous. It is to remedy just 
this defect in our present banking system that the 
present agitation for elasticity is being carried on. 
The Law must have regard for public welfare rather 
than the solvency or insolvency of an individual bank. 

An Amendment of the Bank Act to Enjoin the Pay- 
ment o) Interest on "Issues" to Banks 

A third change in the Law in the interest of elas- 
ticity has been suggested. Writers and publicists 
have called attention to the fact that underneath the 
present Law a small, almost nominal tax is imposed 
on issues. Throughout the course of banking legis- 
lation, and in most of the recent proposals directed 
toward reform, an assumption has run that both the 
bank and the Government may use the same capital 



MODIFICATIONS TO INCREASE ELASTICITY 221 

at the same time, without weakening the resources of 
either. The Government is in need of gold. It 
offers its bonds for sale, and as a means of availing 
itself of a better market holds out to the bank an 
inducement to buy. The inducement offered the 
bank to part with its gold is this : That the bank may 
continue to receive the interest on the bond and at 
the same time have its face value in notes to use as 
money. In this transaction the presumption is that 
the notes will not serve as an elastic medium; the 
presumption is rather that the amount of notes issued 
will, at once, be added to the permanent stock of 
money in circulation. The present nominal tax is 
based on the same theory as the plan of issue — a 
high tax on notes would reduce the inducement to 
purchase bonds and in like degree would depress the 
bond market. The ten per cent prohibitive tax on 
State bank issues proceeds from the same conclusion. 
The bond market is no longer a matter of public 
concern. On the other hand, an elastic currency is 
an end desired. If, in the framing of a banking law, 
all question of Government-credit were abandoned, 
and a tax were laid on issues (or interest were charged 
on the Government loan of " issues") for the purpose 
A use of the in- °f regulating their use to meet the 

terest rate to regu- extraordinary money-demand — if, in 

late circulation ,-i j i ,• 

other words, an elastic currency in- 
stead of a bond market were made the object of legis- 
lation — it is contended that elasticity may be at- 



222 THE BANK AND THE TREASURY 

tained without abandoning the principle of safety 
found in a secured note circulation. For purposes of 
illustration, let us assume that the varying needs for 
money during the year did not fluctuate more than 
$300,000,000. Then the use of the $600,000,000 of 
bank-notes already outstanding might be regulated 
by interest charges as follows: Issues (loans) to the 
extent of five per cent of the capital of National banks 
or an amount ample to cover the active accounts of 
disbursing ofhcers might be at the rate of one per 
cent as compensation for the use of the banks as 
disbursing agents of the Government. Such a low 
interest rate on a small portion of the " issues" would 
also have the effect of keeping a small amount of 
"issues" in circulation to guarantee the ready ac- 
ceptance of the bank-note by customary use. While 
due regard should be had for the right of the banks 
holding bonds with the expectation that issues might 
be had without charge, ultimately, all note issues 
over the suggested minimum might be charged 
with a rate of interest or tax which would make 
bank-notes an emergency money-reserve. A por- 
tion (let us say one-third) might be taxed at a rate 
high enough to preclude its use except in extreme 
emergency. 

The proposition is not a new one. The principle 
has been several times proposed under the name of a 
"tax," but has met with little support. The banks 
have not favored it for obvious reasons; the public 



MODIFICATIONS TO INCREASE ELASTICITY 223 

has not seen the need for such a restriction on the 
issue of notes by banks as will take them out 
Why proposition °f the permanent money stock and at 
has not received the same time force the banks to 
suppor strengthen their capital-resources (i.e., 

to require them to do business on their own capital, 
under extraordinary as well as ordinary conditions) ; 
they have not considered the necessity of compelling 
the less provident of commercial banking institutions 
to furnish out of their own capital-funds a redemption 
equipment strong enough to make secure their credit- 
accounts (so-called deposits). 

The Strength and the Weakness of Secretary Shaw's 

Proposal 

Financial disturbances between 1902 and 1904 
lend force to the reasoning which lies back of such a 
demand. Secretary Shaw in an address before the 
National Association of Merchants and Travelers at 
Chicago has become an open advocate of the prin- 
ciple. "If I were given authority to formulate a 
measure that would provide the requisite elasticity 
Elastic medium to our present currency system," says 
equal to 50 per cent Mr. Shaw, "I think I would add 
of collateral issues^ amendment permitting National 

banks, with the consent of the Comptroller of the 
Currency, to issue a volume of circulating notes equal 
to fifty per cent of the bond-secured circulation, at a 
tax of six per cent, the same to be retired at will (by 



&£4 THE BANK AND THE TREASURY 

the banks) or by direction of the Comptroller, by the 
deposit of an equal amount of lawful money, with 
any Sub-Treasury.'' 

Predicting the result of such a measure in elas- 
ticity, Secretary Shaw continues: "Three things I 
know: First, this additional circulation would spring 
Government in- m ^° existence almost instantly when- 
surance to elastic ever and wherever interest rates ad- 
vanced to the point of profit. Second, 
it would as promptly retire whenever interest rates 
became normal. Third, it would be absolutely safe, 
— as good as the present National bank-issue, and 
with a slight change, identical in form and appear- 
ance, — for the Government, amply protected by the 
six per cent tax, would underwrite it." 

In this we have stated the principle of a current 
charge on "issues" for regulation of that part of the 
money medium which we would have respond to the 
fluctuating needs that could be met by ordinary 
dealings in the market. The charge, however, is to 
be in the nature of a premium paid for insurance. 
In this we have a partial abandonment of the prin- 
Still clings to old ci P le of ''banking on the capital-re- 
idea of support to sources of the bank." The collater- 
bond market a lly-secured note is still to serve as a 
part of the permanent money-supply, and the elastic 
medium is to gain its "soundness" from Govern- 
ment underwriting. In other words, Secretary Shaw, 
while announcing the principle of elasticity, still 



MODIFICATIONS TO INCREASE ELASTICITY 225 

clings to the idea of bank-note issues for the support 
of the bond market, instead of limiting "issues" 
through banks to the fluctuating money needs of the 
country. 

An Amendment oj the Bank Act to Encourage 
Investment of Surplus Capital in "Gilt-Edge" 

Securities 

To the above principles of emergency currency 

may be urged the objection that, from motives of 

business profit, the banks would very largely reduce 

their circulation, and reduce the holdings of United 

States bonds as a basis for issue. Thus, it may be 

said, such a change as that suggested for regulating 

issues, by interest requirement, or by means of any 

other current change adequate to compel retirement 

of issues, would defeat its own ends. To make 

effective a collaterally-secured emer- 
ge inducement . i 
to investment S enc y currency, some inducement 

must be offered to investment in the 
kind of capital-resources which will be received by 
the Government as a basis for issue. Such an in- 
ducement must be found in the rate of return which 
the bank may get on the kind of investments of sur- 
plus money or other capital-resources that may be 
reserved for hypothecation or sale to obtain money 
when needed. 

Under the present Law investments of this kind 
are limited to (i) United States bonds, as a basis for 



226 THE BANK AND THE TREASURY 

issue; (2) loans to (deposits with) reserve agents; and 
(3) more recently, to " gilt-edge'' securities acceptable 
as a basis for Government loans. As to the first class 
of investment the banks get a return below two per 
cent. As to the second class, the rate of return is 
from two to three and one-half per cent; on the 
Investments un- average they are somewhat above two 
der the present per cent per annum. The most prof- 
itable return on " invest ed-reserves" 
is from those securities other than Government bonds 
and reserve deposits — " gilt-edge" securities such as 
have recently been received by the Secretary of the 
Treasury as collateral to " deposit" loans. 

The business advantage of investment of surplus 
capital-resources in this class of securities, and the 
unquestioned soundness of the collateral, suggest the 
application of provisions similar to those advocated 
by Mr. Aldrich and Mr. Payne for the security of 
Government loans to the banks (Government de- 
posits). In a bill introduced in the House of Rep- 
resentatives by Mr. Payne, February 26, 1903, it is 
proposed that the Secretary of the Treasury accept 
as collaterals the following securities: "Bonds of the 
United States, bonds or other interest-bearing obli- 
gations of any State of the United States, or any 
legally authorized bonds issued for municipal pur- 
poses by any city in the United States which has been 
in existence as a city for a period of twenty-five years, 
and which for a period of ten years previous to such 



MODIFICATIONS TO INCREASE ELASTICITY 227 

deposit has not defaulted in the payment of any part 
of either principal or interest of any debt authorized 
Amendment pro- to be contracted by it, and which has 

£!S #at such date more than fift ? thou - 

Payne sand inhabitants as established by the 

last census, and whose net indebtedness does not 
exceed ten per centum of the valuation of the taxable 
property therein, to be ascertained by the last pre- 
ceding valuation of property for the assessment of 
taxes; or the first-mortgage bonds, not including 
street railway bonds, of any railroad company which 
has paid dividends of not less than four per centum 
per annum regularly and continuously on its entire 
capital stock for a period of not less than ten years 
previous to the deposit of the bonds." 

With the utmost safety the Treasurer as trustee for 
the note-holder and as guardian of the principle of 
" sound money" and " sound credit," might receive 
any of these investments as a basis for issues, thus 
giving to the banks a better return than they now 
receive on loans of surplus capital to reserve-agents. 
This would furnish the inducement to the banks to 
carry an " in vested-reserve " that might be made 
immediately convertible. With such oppportunity 
given for investment of surplus money-reserves, and 
with the imposition of a tax which would insure that 
issues would not be put into circulation except when 
the money pressure was above the ordinary, both the 
inducement to invest and the convertibility of the 



£28 THE BANK AND THE TREASURY 

investment by sale or by hypothecation and issue 
would be secured. 

Amendment oj the Bank Act to Require Payment oj 
Interest on Government "Deposit" Loans to Banks 

The same reasoning as is urged in support of a 
charge on " issues" would suggest the imposition of 
an interest requirement on the banks for loans (de- 
posits) from the United States Treasury. What has 
been so carefully called "a deposit" of the Govern- 
ment with a bank is not a deposit in any sense of the 
word. It is nothing more nor less than a loan without 
interest. It is a sale oj money to the bank in return 
The profitable f° r which the Government gets a de- 
character oj these mand credit-claim against the bank 
secured by such collaterals as the 
Treasurer may require. These so-called deposits 
may be made immensely profitable to the bank; by 
using the money so purchased on credit and without 
interest, as a "money-reserve" the bank may pur- 
chase at least four times as much commercial paper 
"on-account" (i.e., in exchange for deposits). For 
this reason, it is that only when pressure is brought 
to bear on the bank by the Government that the 
money is turned back into the Treasury, where it 
belongs. 

Instead of the bank having an inducement to re- 
lieve its hypothecated investment from encumbrance 
as soon as the extraordinary demand for money is 



MODIFICATIONS TO INCREASE ELASTICITY 229 

past, there is a continuing inducement for the bank 
to stretch its credit to the limit at times when money- 
An inducement to demands are small, and then again to 
encumber redemp- appeal to the Government for aid in 
Hon equipment dme of nee(L Another danger lies in 

the fact that the Government is not in touch with the 
commercial world except when appeals are made for 
assistance. It, therefore, knows not when to bring 
pressure for payment; the Government has only its 
surplus loaned and has no need to bring pressure at 
all until current public expenditures begin to run 
ahead of current revenues. 

For these several reasons, an interest charge, 
enough above the usual commercial rate, should be 
made, to compel the bank to do business on its 
own capital and to retain an unencumbered capital- 
surplus convertible by hypothecation with the Gov- 
ernment when commercial-demands might make 
hypothecation profitable. This would make the 
Government surplus an emergency fund that would 
be sought for by the banks only in time of financial 
pressure — a fund which would re- 

Effect of cm in- 

terest charge turn to tne Government immediately 
after the emergency had passed. This 
would, to the extent of Government surplus available, 
avoid the necessity of importing gold when there is 
an adequate supply in the country to meet all mone- 
tary needs, and at the same time would give to the 
banks the advantage of being able to obtain money 



230 THE BANK AND THE TREASURY 

on favorable terms when they have good capital- 
resources to hypothecate. 

The Proposed Amendment for a Guarantee Fund to 
Secure Credit- Accounts 

It has been stated, and, since the days of wild-cat 

banking, the statement has gone without challenge, 

that a commercial bank should not be allowed to 

commence, not to say continue, business until it had 

provided itself with property equipment sufficient to 

make both its " deposits'' (credit-ac- 
Capital support , N j ., , . A 

to credit-accounts counts) and its note-issues secure. A 
proper regard for the principle of 
elasticity requires a re-statement after the manner 
suggested by Mr. Cannon. A bank should have a 
capital equipment large enough to protect its credit, 
and to meet all commercial demands of its customers 
for money without calling in its loans. 

If we accept this as a proper statement of the 
principle of capitalization and equipment, it follows 
that any security given to a bank's credit-accounts, 
or to its note-issues, should be provided out of the 
Contrasted with resources of the bank. The recent 
Government suggestion of Secretary Shaw, in the 
underwriting a(Mress above re f e rred to, is to the 

effect that the amount received from the tax on issues 
(premiums for insurance of issues) should be utilized 
to guarantee the Government against loss from un- 
derwriting the emergency notes of the banks. In 



MODIFICATIONS TO INCREASE ELASTICITY 231 

this the Secretary of the Treasury has not abandoned 
the idea of secured issues, but he would have the 
direct security come from the Government. Those 
who have declared themselves for secured issues 
would have bank-notes secured by the hypothecation 
of the capital-resources of the bank, while others, 
still more conservative, notable among them Mr. 
Dawes, would have the principle of security extended 
to the " deposits'' of the banks as well as to the 
" issues." 

The theory on which "security" or " insurance" 
of deposits rests, is this: that the credit-accounts 
(deposits) of the bank are the form of current funds 
most used in business; that the business of the com- 
munity depends quite as much on the " soundness" 
of bank-credit as on the " soundness" of Government 
credit-money ; that the profits of the bank are derived 
from buying income-producing commercial paper in 
exchange for bank-credit ; the bank, therefore, should 
protect those who have taken its credit in exchange, 
so long as it remains outstanding for current use. In 
other words, the public is quite as much interested in 
"sound bank-credit" as it is in "sound money," and 
since the bank is permitted to issue "current credit- 
accounts" for its own profit it should be required to 
protect these with its own capital-resources. The 
theory is eminently sound in principle, and in practice 
would add much to the integrity of commercial 
bank-credit. 



232 THE BANK AND THE TREASURY 

If we require the banks to deal on their own 
capital, the note-issues should be secured by bank 
assets. Again, if we are to have a true system of 
assets banking, then in so far as the security for 
current accounts of banks is not provided by original 
capitalization it should be derived from their capital- 
ized current-income. An enforced contribution from 
income, in the form of interest payments on Govern- 
ment loans ("issues" and " deposits") 
A trust fund tose- . • i i , i • i 

cure "deposits" m periods when the commercial rate 
is high, would not only operate to 
make elastic that part of our money system repre- 
sented by note-issues and credit-accounts, but might 
also be used to build up a "fund" which would be 
held by the Government for the benefit of the bank's 
creditors. The security of "note-issues" and of 
"deposits," it is argued, would give to all forms of 
credit used as current funds in the community that 
element of security the lack of which has so often 
precipitated wholesale panic and individual disaster. 
Such an insurance fund for "deposits," however, 
could not be built up and maintained on any other 
principle than that of "banking on capital-resources." 
The suggestion for an adequate guarantee fund for 
deposits is premised on an interest charge on secured 
issues, and on an interest charge on secured deposit- 
loans, so made and regulated as to make the capital- 
resources of the bank more readily convertible. The 
secured-note may enter into circulation without ques- 



MODIFICATIONS TO INCREASE ELASTICITY 233 

tion as to the soundness of our credit-money system; 
the guaranteed credit-account might be used in busi- 
ness to give the same implicit faith as to the sound- 
ness of our commercial-bank-credit. With such a 
The benefits of modification in the Law, it is said, if 
secured credit- the Law were properly administered, 
accounts t]ie bankg would be com pelled to do 

a safe business. The banks would be required to do 
business at an increased capital cost, it is true, but 
this would not necessarily mean an increased rate of 
interest to customers, nor decreased profits for the 
banks. As a result of increased capital strength and 
enlarged redemption equipment their credit would 
be more readily salable, and the banks might do a 
larger business than under a system which compels 
them to refrain from credit expansion when accom- 
modation is most in demand. This would bring 
about that much desired condition so zealously ad- 
vocated by Mr. Eckels, in which the Government 
would be entirely divorced from the banking busi- 
ness. All commercial-credit business would still be 
done by the banks; the banks would be operating 
on their own resources; and the Government when 
acting at all would serve in an auxiliary capacity 
only — that of trustee for all parties in interest and 
administrative guardian of the welfare of the nation. 
Similar suggestion has come from several sources. 
The Fowler bill of 1897 contained a provision for a 
guarantee fund. The proposition has been argued 



234 THE BANK AND THE TREASURY 

in financial journals. The opposition developed has 
come largely from the older and stronger banks. To 
them there is an advantage in the unsecured system 
Character oj op- m that their solvency is not questioned ; 
position to secur- and by virtue of their reputed ability 
tng eposts t() mee j. curren t obligations they are 

able to make large sales of credit compared with 
capital employed. To establish a common fund for 
the security of all credit-accounts sold by all the banks 
in the system would give to the small bank the same 
reputation for soundness as is enjoyed by the largest 
institutions. This argument would be valid under 
our present system of banking, wherein there is no 
check on credit sales other than a " money-reserve. " 
If, however, an amendment were made which re- 
quired a minimum cash-reserve to be provided out of 
capital, and the powers of the Comptroller were ex- 
tended to prevent the extension of credit beyond a 
certain proportion of that capital available in the 
form of redemption equipment, neither the large nor 
the small bank could extend its credit beyond the 
prescribed limit. Each bank would be restricted in 
its maximum business to a safe proportion to capital 
invested. Under such a provision, the large bank 
could not be deprived of business by a small bank 
unless the small bank increased its capital, in which 
case the small bank would be entitled to do a larger 
business. It may be questioned whether any pro- 
vision made for increased safety to business would 



MODIFICATIONS TO INCREASE ELASTICITY 235 

reflect on the worthy institution. On the other hand, 
much may be gained by all parties concerned through 
the enlarged opportunities offered to banks for doing 
business. And through a system of mutual respon- 
sibility pressure would be brought by the banks 
themselves for an enforcement of the Law. 

Whatever may be conceived as a proper applica- 
tion, in concrete provisions of the Law, the principles 
governing increased availability of capital-assets of 
National banks and increased elasticity by simple 
changes in the existing system may be summarized 
as follows: 

(i) An amendment of the " money-reserve" pro- 
visions of the Bank Act, requiring a minimum "cash" - 
reserve to be provided out of capital, would operate to 
give increased financial strength to the banks; it 
would make possible increased elasticity of credit- 
accounts and credit-accommodations. 

(2) A change in the Bank Act fixing a minimum 
of "redemption equipment" to be provided out of 
capital, making this proportionate to the maximum 
of credit-obligations outstanding, would operate to 
increase the capitalization of banks. 

(3) An amendment requiring interest payments on 
" issues" (loaned by the Government to the banks) 
would operate to make the note-circulation an 
elastic currency. 

(4) An amendment of the Bank Act permitting 
the hypothecation of " gilt-edge" securities for Gov- 



236 THE BANK AND THE TREASURY 

ernment "deposits" would encourage capital invest- 
ment in more highly convertible assets. 

(5) An amendment requiring the payment of in- 
terest on " deposit" loans would make the Treasury 
surplus an important support to the banks for the 
support of increased credit-accommodation. 

(6) The proposed amendment to constitute the 
Government income from interest on loans, taxation, 
etc., a contingent sinking fund has in it possibilities 
for increasing the soundness of bank-credit and for 
increasing elasticity in so far as elasticity depends on 
public confidence in the banking system. 

(7) A provision requiring that all capital used 
for the purchase of " banking house," "real estate," 
for underwriting, etc., be considered banking capi- 
tal impairment, would have a wholesome effect and 
would serve as a protection to the public. 

(8) A clause requiring that all special and prefer- 
ential deposits be stated in all published reports, 
would do much to correct present evils in banking 
practice. 

Every measure taken to enable banks to meet 
demands for accommodation by use of capital 
equipment would tend to minimize fluctuation in 
demand, and to decrease the amount of capital 
which must be held in reserve in low income-pro- 
ducing investments and thus be to the advantage 
of the banks as well as of the business community. 



Chapter XVII 

SUPERIOR POSSIBILITIES OF THE AMERICAN FINAN- 
CIAL SYSTEM FOR ADAPTING CURRENT FUNDS 
TO CURRENT NEEDS 

A century of adaptation to new and ever-changing 
conditions has given to America some remarkable 
institutions. In none is the strenuous character of 
the people more strongly marked than in our financial 
system. In none have we developed greater possi- 
bilities for solidity and working efficiency than in our 
concerns organized to supply the increasing demand 
for current funds. Living amid great natural re- 
Optimism and sources, hampered for lack of capital 

conservatism as and industrial equipment, working in 

lactoYS in business • i • i • • • 

' circumstances which require intensity 

of effort and strictest economy, the balance of 
National prosperity has been swung by two contend- 
ing forces — the one conservative, the other promo- 
tive. Our conservatism has consisted in measures 
to protect property already acquired. Our promo- 
tions have been efforts to apply all our own resources, 
as well as those which might be acquired from others 
through contracts of current credit and of capitaliza- 
tion. An inventive people, we have exercised our 
best talent in devising ways and means for doing 

[237] 



238 THE BANK AND THE TREASURY 

business, and to this end both capital and current 
funds have been obtained in exchange for contracts 
made for the future delivery of money. The re- 
sult at times has been to carry investment judgment 
beyond all reasonable certainty of return. 

Nor has the situation been an unnatural one. 
With teeming riches on every hand, awaiting only the 
intelligent application of capital for their recovery, 
when markets have been high the inducement to 
promotion and credit investment has been great. 
When failure has come, it has more often been due 
to changes in general market conditions than to dis- 
Failure to meet appointment in productive results. 
contracts for ju- Prospective money returns have not 
ure eivery always been realized within the term 
of a loan. Failure in judgment as to the amount of 
money obtainable in the future has resulted in inability 
to make money delivery — in inability to meet credit- 
obligations. Even when the rewards of nature have 
surpassed all calculation, money payments required 
by contracts of capitalization and current credit have 
not been met. 

As before suggested, the money returns required 
by contracts of credit have depended quite as much 
on the market price obtainable of the thing produced 
as on the amount of the physical product. The mar- 
ket has been subject to world conditions and to fluc- 
tuations which the parties to the contract could not 
foresee; so violently have these fluctuations in world 



SUPERIORITY OF THE AMERICAN SYSTEM 239 

conditions reacted on our credit relations that period- 
ically commerce and industry have become paralyzed 
Failures due to bv forced liquidations and the with- 
world market drawal of working funds. In each 
conditions period of increased world activity and 

increasing financial return, capital has been more 
easily obtained from abroad; with each period of 
decreasing world demand and consequent lower 
prices for products, capital has become more conserv- 
ative, forcing retrenchment and financial readjust- 
ment. Out of such a situation — alternately moved 
by the forces of conservatism (or protection to wealth 
acquired) and by forces of promotion and credit ex- 
pansion (or endeavor for increasing gains) — our 
funding institutions have arisen. 

In the organization and control of institutions of 
current credit, the guiding principle of the American 
people has ever been and to-day is to give to capital 
the highest utility compatible with safety. Pro- 
ceeding from this principle, alternating in control 
between the forces of conservatism and those of 
credit expansion, we have developed a National 
system that is unique — a system in which both our 
money and our commercial funds are on a credit 
basis. In the interest of National economy and 
business safety, our money (largely credit-money) is 
issued by an agency of Federal Government — the 
United States Treasury. For purposes of utility, our 
commercial-credit is issued and controlled by private 



240 THE BANK AND THE TREASURY 

locally- independent institutions — our commercial 
banks. The more vividly to portray our National 
funding system, it has been described as a mammoth 
structure of delicate balance and adjustment resting 
on two independent and widely separated columns 
The principles of or pillars: the one is a column of 

™,L°!!^ e ^l $1,500,000,000 of credit-money, which 

omy in our finan- ' ° ' ^ ' t J ' 

cial system has for its foundation the gold Treas- 

ury-reserves ; the other is a column or pillar of about 
$13,000,000,000 of bank-credit, which has for its 
foundation the reserves of the commercial bank. On 
these two columns or pillars is superimposed from 
$30,000,000,000 to $60,000,000,000 of business-credit 
that looks to the resources of the two independent and 
widely separated institutions above referred to — the 
Treasury and the bank — for support. The great 
problem of the century past has been to make this 
structure a safe one in which to do business. The 
problem of to-day is to so lay the foundations that the 
columns may be able to support the constantly 
shifting strain that is placed upon them. 

In planning for the present as well as for the future 
we must plan for the business of a continent. Our 
The abandonment business demands are larger and more 
of the European varied than those of any other coun- 
s y sem try. Our plans, therefore, must be 

continental. We cannot confine our view to one 
State, as does France, or Spain, or Austria. We 
already have developed a banking power comparable 



SUPERIORITY OF THE AMERICAN SYSTEM 241 

with that of all Europe. From considerations of 
local autonomy and National development we have 
long since abandoned the European system, the cen- 
tral feature of which is a State bank under Govern- 
ment direction and control. 

That the Treasury, under such a system as we 
have, cannot supply the people with current funds 
goes without saying. Even the money-demands of 
commerce and industry cannot be supplied except 
through loans, and the Government has permanently 
retired from the loan business. Loaning is the only 
method by which the fluctuating demand for funds 
may be met under any system of finance. In Ger- 

Therelationofthe man y> in Russia, and in France — in 

Treasury to the fact wherever the general government 
money market {s ^ a banker _ ^^ ^^ may be 

made to the people direct. But under a system such 
as ours, in which the Government has no institution 
of commercial-credit, the only manner in which the 
Government can bring its large financial resources to 
the support of the market is through independently 
organized commercial banks. 

How under Our System the Treasury and the 

Commercial Bank may Work together to Provide 

the Elasticity Required 

Since both money-demands and credit-demands 
fall immediately on the commercial bank it is to this 
that we must look for the means necessary to supply 



242 THE BANK AND THE TREASURY 

these demands. Our inquiry is, therefore, Under 
such a system as that with which we are working, 
how may the banks the better supply the fluctuating 
money and credit-demands, and how may the Treas- 
ury best lend support to the banks without weakening 
Proposed method &s support to the credit- money-issues 
of Treasury of the Government ? Answer to this 
support inquiry has come from some of our 

leading bankers in the following form: "That the 
Treasury be required to deposit all its current funds 
over and above its currency requirements in the 
banks." The reason urged in support of this propo- 
sition is that such a requirement would "prevent the 
money of the country being locked up in the public 
vaults, thus depriving business of its proper use." 
In opposition it is said that the reasoning by which 
the above conclusion is reached proceeds from two 

fallacies : first, that the money held by 
Objections raised the Treasury is abstracted from the 

money stock of the country, and, 
therefore, operates to cripple business, and, second, 
that greater elasticity would be given to bank-credit 
by having the resources of the Government deposited 
in commercial banks. 

The popular notion that money in the vaults of the 
Government is abstracted from the money stock "of 
the country" has already been discussed. There 
can be no reasonable conclusion other than that the 
supply of money for business purposes finds its level 



SUPERIORITY OF THE AMERICAN SYSTEM 243 

through the market, and that whatever is regularly 

held in reserve by any particular government is not 

abstracted from the money-supply of a particular 

Treasiiry stock country, but goes rather to reduce the 
not withdrawn -i i 1 i r ,i i i 

from national available money stock of the world, 

money supply which may be made available for 
private business ends. If, therefore, the Treasury 
surplus of the United States may be made available 
for private business uses in time of extraordinary 
business demand, such Treasury-reserve instead of 
decreasing the money stock of the country will in- 
crease it to the full extent of the amount thus made 
available. Furthermore, it may be said that the 
money in the vaults of the Treasury is not idle. On 
the contrary, in so far as it is needed to support the 
credit-issues of the Government, it gives to the 
country from eight to ten times the amount of money 
which is held in reserve for the support of these 
credit-issues. The Treasury-reserves, therefore, 
enable the Government to supply to the people from 
eight to ten times as much money as it could do at 
the same cost if these reserves were not so held. 

Again, in so far as the general fund of the Treasury 
is not necessary to the support of credit-issues of 
Government they must be looked to as current cash 
for the carrying on of a public institution. To say 
that public business is not a part of the business of 
the country would certainly be erroneous. The 
actual need of the Government for current funds 



244 THE BANK AND THE TREASURY 

with which to carry on its business has been variously 

estimated at from $100,000,000 to $200,000,000. To 

Treasury-reserves the extent that the amount held in the 
may increase na- n-» t 1 

turn's money Treasury is not to supply an actual 

supply funding need this surplus should be 

reduced — but not by loaning it to private parties. 
The Government has obligations of its own to meet, 
and may at any time apply a surplus to their reduc- 
tion. If at any time there may be said to be any 
idle money in the Treasury this is not a fault of the 
system, but rather a fault of those who are operating 
it. But the mere fact of the segregation of public 
funds from private funds leaves the Government at 
all times in a position to lend temporary aid to private 
funding institutions, which it could not do if the 
public funds had been commingled with those of 
private agencies. 

The second fallacy is quite as apparent. To make 
the commercial bank the regular recipient or deposi- 
tory of Government funds as they are received, when 
the Government itself is out of the banking business, 
cannnot add to the elasticity of bank-credit. If Gov- 

Govemment de- ernment-deposits with the banks were 
posits in banks do ,11., -r . ,1 • 

not increase elas- to be ^P* at a uniform amount, this 
ticity amount would soon become absorbed 

in business, and the bank-reserves would be reduced 
to the usual safe working proportion. Whenever an 
extraordinary demand for money or for current funds 
might arise the bank would be in no better position 



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SUPERIORITY OF THE AMERICAN SYSTEM 245 

than before to meet this demand. This is an assump- 
tion most favorable to such a reciprocal arrangement. 
The revenues and expenditures of Government are 
not uniform. Were the revenue receipts and current 
expense payments to be made through the banks this 
would be added cause of monetary and credit dis- 
turbance, since it often happens that the banks are 
hardest pressed and are required to keep the largest 
May increase reserves for their own protection at a 
monetary disturb- time when the expenses of the Gov- 
ernment are in excess of revenues and 
the Treasury surplus is running low. If, for exam- 
ple, the banks had been the fiscal agents of the Gov- 
ernment within the year 1903-4, it would have been 
necessary for them not only to have paid for the 
Panama canal purchase and to have arranged for the 
other extraordinary fiscal payments, but they would 
also have been required to meet a revenue deficit of 
$41,700,000. That is, all of these causes would 
have operated to reduce the Government surplus, 
and the Treasury must have drawn heavily on the 
banks as a means of protecting its own credit-obliga- 
tions. Had these drafts been postponed, the Gov- 
ernment, with a large surplus, would have been forced 
to borrow money to fund its current needs. To 
place the Government in a position of this kind would 
hamper public business without adding anything to 
the strength of the banks. Such an alliance between 
the Government and the banks would reduce their 



246 THE BANK AND THE TREASURY 

ability to extend commercial accommodation and 
would stand in the way of, rather than permit, in- 
creased elasticity in the system. 

The Independent Treasury Increases the National 
Money Supply 

So long as the Government remains out of the 
banking business (and with us this seems to be an 
established policy), the greatest elasticity obtainable 
must come through the collateral support which an 
Independent Treasury is able to give to independent 
commercial banks. The fact that the National 
Treasury carries in its vaults from $100,000,000 to 
$250,000,000 in money over and above its currency 
requirements, and that this may be kept free for 
collateral support to the banks, suggests the basis on 
which the Government may aid the banks to meet 
increased money-demands and at the same time 
permit the banks to increase their credit-accounts to 
customers. It usually happens that the Treasury 
surplus becomes largest in periods of low money- 
demand — at times when the banks are giving an 
inordinate expansion to their credit. For example, 
from June 30, 1899, to June 30, 1902, the ordinary 
Causes money to receipts of the Treasury exceeded the 

%rtdfo?tew g ordinar y disbursements by $345,000,- 
dernand ooo. During the same period the 

bank-credit of the country expanded about $2,000,- 
000,000. From June 30, 1902, to June 30, 1904, the 



SUPERIORITY OF THE AMERICAN SYSTEM 247 

ordinary receipts of the Treasury exceeded the ordi- 
nary expenditures only $12,000,000, and during the 
latter fiscal year there was an actual deficit of $41,- 
700,000. This falling off of Government revenues 
was coincident with great financial pressure on the 
banks, and a consequent reduction in credit-accom- 
modations to the public. 

The net results of the Independent Treasury sys- 
tem during the years referred to have been to bring 
into the United States in time of greatest prosperity, 
and to keep here during a period of credit expansion, 
at least $200,000,000 in gold, which if placed in the 
vaults of banks would doubtless have caused still 
greater credit expansion on the one hand, and at the 
Treasury-reserves same time would have set up an ex- 

released in high portation of gold. Even if no finan- 
money-demand ^ aid had been giyen to ^ banks 

by the Treasury, the result of the independent fiscal 
system would have been beneficial. During the 
period of low money-demand the Treasury was 
gradually absorbing an increasing surplus, thus pre- 
venting exportation of gold, while during the period 
of extraordinary money-demand the Government 
was gradually disbursing the surplus to meet its own 
revenue deficit. The same effect may be traced 
through the recurring periods of credit expansion and 
credit retraction since the Independent Treasury was 
established, 



248 THE BANK AND THE TREASURY 

Collateral Aid of the Treasury to Prevent Credit 

Contraction 

But the history of the last ten years (1898 to 
1908) teaches another lesson, which by the banks 
should never be forgotten. When the effects of 
speculative loans had brought about credit reaction, 
and business conservatives began to demand settle- 
ment on contracts for money delivery, and when in- 
creased pressure was brought on the banks for money 
payment, the rapidly disappearing reserves would 
doubtless have proved ruinous, not only to the banks 
but also to the commercial and industrial interests of 
the whole nation through the collapse of the bank- 
credit column supporting them, had not the National 
Treasury responded to pleas for aid from commercial- 
credit institutions. A volume of credit had been 
May support piled up which was too great for the 
the banks in time banks to support on their own re- 
0} s ress sources. The crumbling foundation 

of bankers' reserves would doubtless have gone from 
under and given way to the financial stress which 
business interests were bringing to bear on them had 
not the Government transferred about $200,000,000 to 
their support. Had the prescription above referred 
to as a remedy for inelasticity and for financial weak- 
ness been followed, had the Government previously 
deposited its surplus in the banks during these years 
of so-called prosperity, instead of giving to the great 



SUPERIORITY OF THE AMERICAN SYSTEM 249 

National credit structure the solidity and the power 
of endurance which is bespoken for it, it would have 
had the effect of adding nothing to the capital 
strength of our commercial-credit institutions; it 
would have made the superstructure still more top- 
heavy — would have placed our funding system in 
the same position as were those of Germany, Russia, 
England, and France. That our business suffered 
less than the commerce and industry of Europe 
during the same period was largely due to the very 
subsidiary reserves of which certain individuals are 
heard to complain. 

The Independent Treasury gives to the American 
system a strength that is not attainable under any of 
the much lauded foreign financial devices. The fact 
is that we have not used the Independent Treasury 
to its highest advantage. The deposits made by the 
Government with banks are loans without interest. 
So long as the Government does not call these leans 
there is no inducement for the banks to pay them. 
On eight different occasions from 1899 to 1908 the 
Treasury has helped the banks to support their 
financial burdens. In each case the strain upon 
them was due to an over-issue of their own credit 

and to inability to make the money 
Some recent ex- , j -, -, ., -, , 

-benefices payments demanded without a vio- 

lent contraction in credit-accommo- 
dation. The Government has stepped in to prevent 
this contraction. But when the stress was past, what 



250 THE BANK AND THE TREASURY 

then? Did the Government again gradually repos- 
sess itself of the moneys gratuitously loaned? Has 
it again reclaimed the means by which assistance was 
rendered ? No ; following just such reasoning as has 
been quoted, loans have remained with the banks 
still without interest. At times the Treasury has 
been able to come to the relief of the banks by reason 
only of its constantly increasing surplus. 

The weakness in the situation lies in the failure 
of the Government to charge a rate of interest which 
will cause the banks themselves to voluntarily repay 
loans when the emergency is past, and when the 
reserves of the banks become adequate to support 
their credit. In July and August, 1904, the bank- 
reserves piled up till they were becoming a source of 
possible weakness. When the Panama canal pur- 
chase was to be settled for, when the 
Weakness in ^ , , £ n 

present practices Government revenues ^ began to fall 

off, instead of demanding a return of 
loans to the banks and thus reducing the large sur- 
plus-reserves which the banks had accumulated, the 
Government preferred to still further reduce the 
reserves in its vaults, calling on the banks for only 
such an amount as seemed necessary. During the 
month of September there was a gradual withdrawal 
of bank reserves to supply the business need. Under 
circumstances of weakening bank reserves and of 
gradually decreasing revenue of Government, with 
the consequent disappearing of the Treasury surplus, 



SUPERIORITY OF THE AMERICAN SYSTEM 251 

the banks may not only be deprived of collateral aid 
in time of financial stress, but may be required even 
to still further weaken their money-reserves by 
making payments to the Government. Under such 
circumstances, the banks would be left to their own 
resources, with the Government money-demand as 
well as the public money-demand to supply. The 
result would be that in their own protection the banks 
would be forced to contract business accommodation 
in such a way as to make the present practice posi- 
tively dangerous. 

How the Treasury Surplus may be kept as a Reserve 
for Collateral Support to Credit 

At no time in the history of banking were the time 
and circumstances more opportune for Treasury sup- 
port to banks than in 1902 and 1903. At no time in 
our history might the Secretary more wisely have 
withdrawn the Government deposits than in July 
and August, 1904, when the money-reserves were 
piled up in the vaults of the banks. The effect of 
failure to do this was twofold: (1) The cheapness of 
Interest charges money caused an exportation of gold; 
to insure prompt (2) the low rate of call-loans encour- 
payment oj loans aged speculation . In September we 

had the result made apparent of a concurrent flow of 
money to the interior and abroad, and at the same 
time an increase in speculative activity which went 
on unabated till about December first. Thus again 



252 THE BANK AND THE TREASURY 

we had a brief period of increasing credit expansion 
and decreasing bank-reserves. These movements 
did not prove threatening, it is true, but there was 
present a possibility that the banks might again call to 
the Treasury for collateral aid, and under conditions 
which would require the Treasury to turn a deaf ear. 
Following a practice by which the Government loans 
its surplus to the banks without interest or below the 
ordinary market rate, the continuous aid of the Treas- 
ury to the banks may depend on the exercise of dis- 
cretion by the Secretary. If, however, the Govern- 
ment were to charge the bank, not an exorbitant rate, 
as would a money-lender in time of stress, but the 
usual commercial rate, the bank would promptly 
return the loan when money falls below the usual 
price. In either case, whether by exercise of official 
discretion or by charging a rate which would make 
the restoration of reserves autonomous, the Treasury 
support to the system would not be weakened. 

Elastic Possibilities in the Bank-Note 

It has been pointed out that even if the Treasury 
never had a surplus to loan to the banks in periods 
of emergency, under the American system we have 
possibilities for increasing circulation for current 
needs that are not inherent in foreign systems. This 
is in the so-called issues of banks. If the bank has 
unencumbered resources (mind you, ^encumbered 
resources) necessary to obtain a Government "de- 



SUPERIORITY OF THE AMERICAN SYSTEM 253 

posit " (loan), these same resources may be pledged 
for issue — a loan from the Government in the 
Equal to fluctu- form of " bank-notes." July i, 1904, 
ating money- the Treasury reported that there were 
-1,000,000 of bank-notes in the 



hands of the banks or in circulation. These issues 
alone were more than ample to meet all fluctuations 
in money-demands of the country. The only trouble 
is (as in the case of a permanent policy of depositing 
Government surplus with the banks) that when the 
banks are in trouble these notes are not available. 
Like the Government deposits, they have already 
been absorbed in current circulation, have all been 
used to support the ordinary banking operations 
during periods of low money-demand, and in time of 
strain the banks have their best securities tied up for 
funds with which to do business when there is no 
strain to be met. In time of extraordinary demand 
the banks were left helpless. 

Why should this be so? Why might not these 
notes have been used in such a way as to have per- 
mitted an increase of $400,000,000 in money circu- 
lation and a simultaneous increase of at least $1,600,- 
May be made to ooo,ooo,of bank-credit-accounts at the 
respond to de- time that extraordinary demand for 
funds were made. Many bankers 
have suggested as a way out of the difficulty that a 
tax be placed on issues. Secretary Shaw in his Chi- 
cago address four years ago pointed to this. Re- 



254 THE BANK AND THE TREASURY 

quire the banks to pay a tax equal to the commercial 
rate of interest (let us say five or six per cent) on all 
issues over and above a determined minimum — or 
call it interest on the "issue loan" of the Government 
to the banks — and the banks would not encumber 
their assets except when money-demands were above 
that rate. These suggestions are made with much 
force. The result may also be predicated on ex- 
perience. As the trustee of collaterals and as the 
department of issue and control of the bank-note, 
the Treasury might thus lend as much support for 
the expansion of money circulation and current credit 
accommodation as the system itself would require. 

Aside from making the bank-note circulation in 
large part an emergency currency, aside from giving 
elasticity to our National money and credit system, 
the effect of such a Law would be twofold. By 
taking a large part of the present issue of bank-notes 
out of circulation, except when an extraordinary de- 
mand arose, the ordinary demand must be supplied 
The effects of a law hy other forms of money — the 

7n^de7ostl^ eSt amount taken out of ordinary circu- 
and "issues" lation must come from some other 
source. This would necessitate an increase in gold 
certificates or other forms of money-issue. The 
ordinary money requirement would be met, but it 
would not be met by bank-notes. The necessary 
money-funds would come either from an increase in 
issues of Government or from importation of gold. 



SUPERIORITY OF THE AMERICAN SYSTEM 255 

The second result that would obtain has a bearing 
on the financial strength of the banks themselves. 
If the banks were not encouraged to encumber their 
best resources in time of low money-demand; if, it 
may be said, they were required to retain their 
capital in such form as to make it available for sup- 
port of their credit and were permitted to deposit 
"gilt-edge" securities of such kind and quality as 
might be prescribed by the Treasurer for bank-notes 
in time of strain, the support which is now given to 
the credit of Government in the form of increased 
strength to the bond market would then be given to 
the banking business. In other words, the net result 
would be an increase of banking-capital for banking 
purposes and an increase in standard money in the 
country — a result which in itself would be desirable 
as a means of supporting greater elasticity in credit- 
accommodation. 

Support which the Treasury may give to the Money 

Market 

Another conservative principle is contained in the 
American system that is not afforded by that of any 
other country: As the one institution permitted to 
issue credit- money the Treasury gives to the people 
a form of currency more convenient in use than gold, 
and less expensive to itself. The silver dollar, the 
greenback, the silver certificate, etc., cost the people 
who use them just as much as gold coin or gold 



256 THE BANK AND THE TREASURY 

certificates, but the cost to the Government of these 
credit-moneys is less. By means of their issue the 
Financial advan- Government is able to carry on its 
tage of credit- own business and to decrease its inter- 
money-issues e st-bearing debt about $600,000,000. 
What the Treasury stands pledged to do and what it 
is necessary for it to do under our system is to pro- 
tect these credit-issues, i.e., to make payment in gold 
when gold is demanded. So long as no doubt arises 
as to this there can be no financial disturbance on 
that account. But there may be a distinct advantage 
to the money and credit system. If at any time our 
foreign balances demanding settlement become so 
great as to cause a drain on bankers' gold reserves 
(the foundation for some $13,000,000,000 of bank- 
credit), it may become necessary to stay the tide of 
exportation as a means of protecting the National 
credit structure. This result will be effected through 
the demands made by the banks on the United States 
Treasury for payment of Government credit-issues. 
That is, through their own reserves the banks may 
reach the gold reserves of the Treasury and bring them 
to their own support. Under such circumstances and 
at such time the Government will be brought into 
the gold market as a means of meeting its own de- 
mand debt, and gold may be had for the support of 
the credit of American Funding Institutions at a rate 
more favorable than it could be had by any indi- 
vidual, private banking corporation, or foreign nation. 



SUPERIORITY OF THE AMERICAN SYSTEM 257 

No greater fallacy was ever put forth than that 
which concludes that a Government which is not in 
the banking or loan business can supply money 
capital direct for private business. If all the gold 
coin of the world were stamped and issued from the 
United States mint, so long as the business habits of 
our people remained the same, no greater amount 
of gold would find its way into American channels of 
trade. On the other hand, if the Government did 
not issue or coin a dollar the people would have the 
same amount of money which they now have with 
which to do business. Our circulation would not 
increase or decrease in either case. Instead of buying 
gold and taking it to the mint we might buy foreign 
coins ; instead of retaining the currency issued by the 
Government or that put out in payment of its own 
obligations we might have some other form of cur- 
rency. But the usual amount of currency would be 
supplied from one source or another by coinage, by 
issue or by importation, in exchange for products of 
our mines, our manufactures, etc. What the Gov- 
ernment can do and does do is to make the moneys 
ordinarily needed and currently used conform to a 
National standard, and to protect these in their 
Superiority of financial and physical integrity against 
i *S?5T -Parent. More than this, the 
Ulities Government may provide a means by 

which extraordinary demands for money may be met 
without resort to importation. It may make pro- 



£58 THE BANK AND THE TREASURY 

vision for meeting this fluctuating demand through 
the banks, and it may make this extraordinary 
money-supply more readily obtainable than might 
be if our traders and manufacturers were required to 
go abroad for it. This may be done either by direct 
money loans to the banks from the Treasury reserves, 
or by temporary credit-issues to the banks. Instead 
of the banks pledging securities abroad, the way 
should be opened to pledge them with the Treasury 
and thereby obtain any amount of money for such 
extraordinary circulation that is needed without dis- 
turbing domestic and foreign trade. And for this 
purpose no system is so well adapted as the American 
system, having for its main support the two independ- 
ent financial institutions — the independent com- 
mercial bank and the Independent Treasury, the one 
representing the financial resources of fifteen thou- 
sand independent banking institutions, the other 
representing the combined resources of the nation. 



Chapter XVIII 

RECENT EFFORTS TO ADAPT OUR CURRENCY AND 

BANKING SYSTEM TO THE NATION'S 

BUSINESS NEEDS 

Among the results already accomplished in the 
effort to adapt our funding system to the nation's 
business needs, prominently stand out the following : 
(i) The abandonment of the European funding system. 
This was effected through the refusal of the Federal 
Congress to incorporate the third bank of the United 
States, and by the contemporaneous withdrawal of 
the several States from commercial banking enter- 
prises. (2) The establishment of independently capi- 
talized commercial banks in each locality whose private 
funding needs and resources were sufficient to induce 
capital to interest itself in this form of undertaking. 
(3) The establishment of an Independent Federal 
Treasury — a department of Government which pro- 
vides the means necessary for meeting public fiscal 
obligations without drawing on private capital and 
Adaptations al- without disturbance to local business. 
TmlkanVol- (4) The Le g al Tender Acts, and the 
ditions several Currency Acts, and National 

Bank Act — which not only completely segregated 
the functions of money coinage and money-issue 

[259] 



260 THE BANK AND THE TREASURY 

from those of banking, but also collected into a 
national system the best experience of a quarter of a 
century of independent banking. (5) The gold 
standard currency Act of 1900 — which made certain 
all question as to the standard of money valuation 
and of credit-money payment — which enjoined the 
Treasurer to maintain all the money-issues of the 
Government at a valuation equal to the prescribed 
standard — and which adequately capitalized the 
ability of the Division of Issue and Redemption of 
the Treasury to redeem all credit-money obligations 

(1) through placing in the hands of the Treasurer an 
adequate gold fund to be protected as a " reserve," 

(2) by giving to this fund a first lien on the "general 
fund" of the revenue department of the Treasury, 
and (3) by arming the Secretary with the full loan 
power of the national Government, as a means of 
ultimate redemption of credit-money-issues. 

These results are accomplished facts. The credit- 
money-issues of the Treasury are "sound." They 
pass without question in any part of the world at par 
with gold coin of the United States. American 
National banks, as independent institutions likewise, 
are as "sound" as those of any other country, 
The need which Neither has our banking system as a 
has not been sue- whole, and our business, suffered more 
cess fully met from "inelasticity" f current-funds 

than have the older nations of Europe. Still, our 
funding system is admittedly far from being satisfac- 



EFFORTS TO MAKE FURTHER ADAPTATIONS 261 

tory ; there yet remains a condition present which we 
cannot fail to recognize as a subject of serious con- 
cern — viz., that our own funding system (as well as 
theirs) has not satisfactorily met the shifting and 
fluctuating demands of trade, and that business has 
suffered much on this account. This is the subject 
of present solicitation and of many prospective meas- 
ures of reform, a critical review of which is presented. 
Before undertaking a critical review, however, 
some definite standard of analytical and critical 
judgment must be found. This standard is taken 
from two fundamental conclusions which would seem 
to be well established in American thought: (i) That 
an institution, public or private, which is authorized 
Standards of judg- to issue credit-money should be capi- 
ment of measures talized sufficiently to enable it to 
propose maintain adequate reserves with 

which to redeem these credit-issues in the standard 
money of the realm, at par, on demand. (2) That 
a commercial bank which is not supported by the 
Government should be required to do business on 
its own capital. That is to say, that an institution 
which is authorized by charter to circulate its own 
credit-accounts in the community for current funds 
should have a capital sufficient to make it a safe 
institution with which to do business; and that the 
capital should be guarded as a special fund to main- 
tain " reserves" with which to meet current demands 
for payment on these credit-obligations without 



262 THE BANK AND THE TREASURY 

forcing commercial credit contraction by liquidation 
and without endangering public welfare. 

Accepting these general conclusions as principles 
fundamental to " sound currency" and "sound bank- 
ing, " several other conclusions would seem war- 
ranted : 

I. That so long as we retain the gold standard of 
valuation and of credit redemption, all issues of the 
Treasury (including silver coins and silver certifi- 
cates, as well as currency obligations) should be 
interchangeable and should be recognized as prom- 
ises of the Government to pay gold on demand. It 
being made the duty of the Treasurer to maintain all 
issues at par, the "gold reserve" in the Division of 
Issue and Redemption, the lien on the "general 
fund" of the Treasury given to this division, and the 
loan power in the hands of the Treasurer for reim- 
bursement of the gold reserve thus created, should 
be placed behind the silver coins and silver certifi- 
cates of the United States as well as behind the green- 
backs and the Treasury notes of 1890. The duty of 
the Treasurer with respect to the prompt redemption 
of these issues should not be left subject to doubt 
through failure to make specific mention of them for 
a guide to official conduct. 

II. In passing judgment on measures proposed to 
increase the "soundness" of commercial credit-funds 
issued by banks (bank accounts) the following prin- 
ciples of capitalization should be recognized: (1) 



EFFORTS TO MAKE FURTHER ADAPTATIONS 263 

That no resources of a commercial bank should be 

regarded as " unimpaired capital" which are not 

proper capital investments and which may not be 

available as a fund to supply the bank with "cash" 

to redeem its outstanding credit. (2) That the 

amount of capital which is to be con- 
Sound banking *j 1 -111/ • i\ 

conclusions sidered as available (or unimpaired) 

for the support of credit-accounts 
should be specifically "reserved" for that purpose 
and protected as a "reserve fund," and should not be 
allowed to become encumbered or to be so used as 
not to be at all times accessible for the redemption 
of demand credit-obligations. (3) That all funds 
which are to be considered as "reserves" for redemp- 
tion of current credit-obligations should be capital 
funds, and the accounts kept and reports published 
of "reserve funds" should not include money or 
other assets borrowed from customers — i.e., ob- 
tained in exchange for credit liabilities. (4) That 
banks should never be permitted to extend credit 
(sell an amount of credit-accounts to customers) 
which is not adequately protected by such capital 
reservations; i.e., a limit of safety should be placed 
on the amount of credit-obligations which a bank 
may issue proportionate to "unimpaired capital." 
(5) That when any portion of the capital of a bank 
shall be lost, or encumbered, or in any manner 
rendered unavailable (as in the purchase of real- 
estate or in underwriting), that the limit of credit 



264 THE BANK AND THE TREASURY 

issue permissible to such bank should be reduced in 
proportion to the amount so rendered unavailable 
for current redemption purposes. (6) That if branch- 
banking be authorized, the amount or proportion of 
unencumbered capital " reserves" should be the same 
as those required of individual banks. 

III. Government issued currency, and privately 
issued commercial-credit funds, having been ren- 
dered " sound" by the Treasury and the bank each 
adequately capitalizing its redemption needs, " elas- 
ticity" in such a funding system as ours would re- 
quire: (i) That, since the Treasury cannot supply 
directly to the people the funds required in business 
to meet the fluctuations in money-demand as well as 
in commercial credit-demands, these funds must be 
supplied by commercial banks. (2) That, since the 
banks are organized and capitalized to supply current 
Conclusions with credit-accounts to the public at a 
respect to elas- profit, and the chief fluctuations in 
haty money-demands are bankers' de- 

mands to keep up the money-reserves drawn against 
by those holding current accounts, the unimpaired 
capital of banks should be sufficient to procure this 
extraordinary money-supply when needed. (3) That 
the surplus capital reserves of banks, kept for the 
purpose of expanding the money-supply, either as a 
means of supporting credit-accounts or of expanding 
credit-accommodations, should be invested in such 
securities or other assets as are readily convertible 



EFFORTS TO MAKE FURTHER ADAPTATIONS 265 

and such as will be received by the Treasury as 
collateral for money loans to the banks. (4) That 
these Treasury loans, whether in the form of gold 
(" deposits") or credit-money ("issues") should bear 
a rate of interest which will cause the banks to retire 
from circulation the extraordinary money- supply 
when not needed — i.e., when customers reduce the 
extraordinary amount of credit-accommodations ex- 
tended to them by the banks. 

With the foregoing canons of critical judgment 
before us, the following proposed measures will be 
discussed in the order set out: (1) The Baltimore 
Plan; (2) the Carlisle Plan; (3) the Fowler Bill of 
1897; (4) the plan of the Monetary Commission of 

the Indianapolis Convention, 1898; 
Measures Ms- (j) ^ McCleary Bm of lgg& . (6) the 

Gage Bill of 1900; (7) the Currency 
Act of 1900; (8) the Fowler Bills of 1902 and 1903; 
and (9) the Payne Bill of 1903. In taking them up 
for detailed discussion, it should be held in mind that 
at the time the Baltimore Plan was proposed, con- 
flicting legislation had brought the Treasury into 
financial disrepute and shaken confidence in its 
credit-issues. The Currency Law of 1873 had es- 
tablished the gold standard and had made it the 
duty of the Treasurer to maintain all issues at par, 
but the only means placed in the hands of the 
Treasury to do this was the gold-reserve fund ($100,- 
000,000 for redemption of United States notes 



266 THE BANK AND THE TREASURY 

created by the Resumption Act of 1878) and the 
loan power given to the Secretary. Notwithstanding 
this and the fall in the price of silver, measure after 
measure by Congress was made law which forced 
into circulation such volumes of silver and silver 
obligations as to render impossible the maintenance 
of parity of money-issues by means of the fund at 
the Treasurer's disposal. The results were a vio- 
lent shock to national credit, Government bor- 
rowing to support an inadequate reserve, and the 
sound money campaign. 

The Baltimore Plan 

Just emerging from this situation the Baltimore 
Plan (a proposition made by a committee of bankers 
to the American Bankers' Association meeting at 
Baltimore in October, 1897) became a subject of 
general interest. Though primarily intended as a 
currency measure, the plan proposed also bears a 
close relation to the bank, since the Treasury prob- 
lem was to be solved by placing its burdens on the 
bank. Currency was to be furnished to the country 
by permitting the banks to issue to the extent of 
seventy-five per cent of their capital. No bond de- 
posits with the Treasury were to be required, (1) be- 
cause the National debt was fast being paid, and 
(2) because it was thought the currency could just 
as well be secured and the fluctuating demands could 
better be met without such a provision. To make 



EFFORTS TO MAKE FURTHER ADAPTATIONS 267 

the bank currency "sound," current redemptions 
were to be made through the Treasury out of a five 

A sound cur- P er cent " redemption fund" as at 
rency provided present. Ultimate redemption was to 
' or be provided for by the creation of a 

common "guarantee fund" equal to five per cent of 
the total circulation, and by making the issues of 
each bank a first lien on its assets. This would have 
met every requirement as to soundness, since so long 
as the bank remained solvent the redemptions would 
currently be met out of the "redemption fund," and 
as soon as the bank became insolvent the very cause 
of its insolvency (credit expansion) would add 
strength to the notes; that is, the greater the credit 
liabilities incurred by the bank the greater would be 
the amount of the assets acquired on which the note- 
holders would have a first lien. 

In the event of the adoption of this plan, therefore, 
sound currency would have been obtained through 
decreased banking strength. The capital of institu- 
tions created for the purpose of supplying sound 
commercial credit-accounts to the community would 
have been impaired by using it to capitalize the 
credit currency issues — to do for the credit- money 
Sound currency circulation what the Treasury had 
at the expense of failed to do. By placing their re- 
banking strength sourceg back of ^ mQney circu]ation 

their banking capital would have been encumbered 
and to that extent rendered unavailable for support 



268 THE BANK AND THE TREASURY 

of credit-accounts — the true banking purpose. This 
impairment would have resulted in two ways: (i) By 
permitting the banks to issue notes equal to seventy- 
five per cent of their capital and to use these notes 
for money, their current money needs would have 
been met by their own obligations to deliver legal- 
tender or standard money in the future — thus en- 
couraging low capitalization; (2) by making these 
note-issues a first lien on commercial assets and 
requiring no deposit or specific reservation of capital 
assets for their ultimate redemption, the capital 
assets to be used for banking support as well as the 
commercial assets for the final redemption of out- 
standing accounts would be reduced without making 
this fact apparent to the public. 

Provision was made for elasticity in money-supply 
by permitting the banks to issue notes equal in 
amount to fifty per cent of their capital at a nominal 

tax (one-half of one per cent per an- 
Provisions for \ j r • u j.i_ • 

elasticity num), and for issues above this amount 

subject to a tax heavy enough to com- 
pel retirement except when money rates were high. 
This was a true principle for an " emergency circula- 
tion/ ' and the amount provided would have been 
adequate to supply all ordinary money-demands. 
But if at any time an extraordinary demand were 
made for standard money this emergency currency 
would have been an added cause for the contraction 
of credit-accommodations. In other words, while 



EFFORTS TO MAKE FURTHER ADAPTATIONS 269 

the method proposed provided for an increase in 
credit- money circulation to meet the bank's fluctuat- 
ing money-demands, it did not provide for an ex- 
panding standard money base of credit expansion ; it 
did not provide for " elasticity" in the very sort of 
funds in which greatest elasticity is required — 
credit- accounts. As a banking measure it was weak, 
both from the point of view of "soundness" and of 
"elasticity." 

The Carlisle Plan 

Under similar circumstances Mr. Carlisle (then 
Secretary of the Treasury) suggested a measure of 
relief. Like the Baltimore Plan, this was also in- 
The primary tended to solve the sound money 
purpose of the problem. Again the Government is- 
sues were to be strengthened by shift- 
ing the credit-money load from the Treasury reserves 
and placing it on the banking reserves. Instead of 
increasing the capital support of the Treasury for 
meeting its own current monetary obligations, as was 
finally done in the Currency Law of 1900, the credit 
issues of the Government were to be supplanted by 
credit-issues of the banks. Not only were the 
National banks to be permitted to issue notes to the 
amount of seventy-five per cent of their capital and 
surplus, but under like conditions the State banks 
and institutions were to be given the same issue 
privileges. 



270 THE BANK AND THE TREASURY 

As a money measure this one was also, in principle, 
eminently " sound." Current redemptions were to 
be made by the banks and through such agencies as 
were to be officially designated. Security for ulti- 
mate redemption of issues was to be 
Sound money ., ■, , ■, ., r m 

provisions provided by a deposit of Treasury 

issues equal to thirty per cent of the 
amount of circulation taken out; a common guaran- 
tee fund was also set up similar to that contained in 
the Baltimore Plan, and the notes were to be a first 
lien on all assets and on the contingent stockholders' 
liability of the individual bank issuing them. The 
notes, therefore, had all the security that might be 
desired. 

As a banking measure, all that has been said con- 
cerning the Baltimore Plan may be urged with 
reference to this, except that the banking capital 
would not be so seriously impaired. A bank must 
capitalize thirty per cent of its note- issues before ob- 
Unsoundness of taining them, but the remaining 
the plan as a seventy per cent of notes outstanding 
were an encumbrance on the capital 
intended for commercial- credit support. The banks 
were to assume these public money burdens, which 
with a $100,000,000 gold-reserve the Treasury had 
been unable to bear up under, and without making 
any provision for an increase in capital. The anoma- 
lous position was again taken that what had proved 
a burden on the Treasury would not prove a burden 



EFFORTS TO MAKE FURTHER ADAPTATIONS 271 

to the banks. The credit-accounts of the banks 
were to be sacrificed as a means of giving financial 
strength to the money circulation. If adopted, the 
measure would have crippled the banks for perform- 
ing the commercial-credit functions for which they 
are created. 

In the Carlisle Plan no provision was made for an 
elastic money medium. Every inducement was 
offered the banks to force out notes and to make them 
the permanent money stock of the community. If 
they failed to keep out all their notes it would be only 

because the country could not use as 
No provision for , , , * , i • j 

elasticity much money as they were authorized 

to put out, and in case the full amount 
were absorbed, then no provision was made for an 
increase. But even if they did not succeed in keeping 
out the full amount of the authorized issue and an 
extraordinary demand were made for gold or legal- 
tender issues of Government, then the volume of 
bank-notes outstanding would force a contraction of 
credit-accounts as a means of obtaining a supply of 
legal-tender Government issues for banking reserves. 
/\ny extraordinary money-demand would therefore 
increase the weakness of the credit-accounts of the 
banks and would cause still more violent credit 

reactions. 

The Fowler Bill oj 1897 

Like the Carlisle Plan, the Fowler Bill of 1897 was 
intended to relieve the Treasury as well as amend the 



272 THE BANK AND THE TREASURY 

Bank Act. As a currency measure it proposed to 
supplant completely the credit-issues of the Treasury. 
This was to be accomplished by requiring all banks 

availing themselves of the issue-privi- 
The general plan lege to purchase and surrender to the 

Treasury for cancellation, legal-tender 
notes, Treasury notes of 1890, and gold certificates 
equal to their " legal reserve" requirements, and to 
receive in return an equal amount of gold and silver 
coins. This would have taken care of the Treasury 
issues by forcing the Government to pay them. The 
ordinary money requirements for general circulation 
were to be supplanted by bank-notes secured by 
bonds ($700,000,000). Besides the gold and silver 
banking-reserves, and the bank-notes for general 
circulation, an "emergency currency" in the form of 
bank-notes was provided for equal to the combined 
capital and surplus of banks availing themselves of 
the issue- privilege. This emergency currency was to 
be taxed at a graduated rate from one to ten per cent, 
the tax ranging from six to ten per cent after the 
amount of issues reached sixty per cent of capitaliza- 
tion. As the average rate of taxation below this 
amount was only two and one-third per cent, it is to 
be presumed that at least sixty per cent of the "emer- 
gency currency" might have been used to supply 
ordinary money-demands, only the amount above 
sixty per cent being intended for retirement after the 
extraordinary money-demands had passed. 



EFFORTS TO MAKE FURTHER ADAPTATIONS 273 

Considering the question of " soundness" the 
Treasury issues were practically to be eliminated by 
Sound currency payment. The bank-notes were to 
and sound bank- be partly secured by bonds, and the 
tng provisions remainder were secured by a first lien 
on assets and a first claim against stockholders. 
Besides, a common guarantee fund was to be created 
by the several forms of tax levies, which fund was to 
be used (i) to redeem the bond-secured notes, and 
(2) for the redemption of emergency notes. This 
fund was to take the place of the bonds as they were 
gradually retired. Provision was also made for se- 
curing the current bank liabilities through the crea- 
tion of an insurance fund of five per cent of the 
average deposits. The customer was to be further 
protected by closer supervision and control. Branch- 
banking was to be permitted under conditions which 
gave the public the same protection as with individual 
banks. 

Had the measure become a law and been enforced 
on all of the banks, State as well as National, the 
Treasury would have been completely relieved from 
its credit-money obligations, a sound credit-money 
would have been provided, the banking reserve re- 
quirements would have restricted the 
Defects in the ,., . .-, ■, 

bill credit-money-issues to the amount de- 

manded for general circulation, the 
banks would have been forced to increase their 
initial capital, and an increasing capital surplus 



274 THE BANK AND THE TREASURY 

would have been accumulating as a guarantee fund 
for note redemptions. Furthermore, the competi- 
tion between the banks would have forced them to 
insure their accounts, thus again increasing the 
capital surplus for the protection of holders of credit- 
accounts, and the interest of the stronger banks in a 
common insurance fund would have forced a rigid 
inspection and official control of the affairs of the 
less provident. To meet these requirements the rel- 
ative capitalization of banks for redemption of notes 
and credit-accounts must have at least doubled. 
But the law had two weaknesses: (i) That its accept- 
ance by National banks was made optional; (2) the 
capital requirements were so great that if made com- 
pulsory it would have driven all National banks out 
of business in competition with State banks. Such 
a law could never have been made effective unless 
State and private, as well as National banking institu- 
tions — all concerns permitted to do a banking busi- 
ness — had been required to adopt its provisions or 
as a penalty for non-acceptance be placed under a 
still more serious disability. 

The Plan of the Monetary Commission 0} the 
Indianapolis Convention 

Immediately after the election in 1896, the presi- 
dent of the Board of Trade of Indianapolis issued an 
invitation for a National sound money conference. 
In response a convention assembled January 12, 



EFFORTS TO MAKE FURTHER ADAPTATIONS 275 

1897, the principal result of which was the appoint- 
ment of a commission to prepare a report and memo- 
rial representing the best " sound money" ideals. 
As a part of their work a bill was drafted, which was 
introduced into the House of Representatives by Mr. 
Overstreet. This was the first reflection of the direct 
"Soundness" of spirit of the campaign which required 
mon £l ~£ SU % j an adequate capitalization of Govern- 
or ment credit-money-issues. The Treas- 
ury was to have a special division of Issue and Re- 
demption, to which were to be transferred all funds 
created for the redemption of Government monetary 
obligations. The outstanding issues were to be made 
sound by transferring from the general fund to this 
division gold to the amount of twenty-five per cent 
of all United States and Treasury notes of 1890. 
Silver coins and silver certificates were to be made 
exchangeable for gold, and besides the value of the 
silver contained in the coins and held against cer- 
tificates, five per cent of all silver obligations was to 
be added to the gold-reserve to insure current re- 
demption. This solution of the money problem, 
however, was to serve a temporary purpose only, 
since the gradual retirement of all obligations of the 
Treasury except silver was specifically provided for. 
The ultimate solution of the money problem was to 
be by the same method as proposed in the Baltimore 
Plan, — to shift the burden of money issue from the 
Treasury to the banks, and to secure their payment 



£76 THE BANK AND THE TREASURY 

by a current " redemption fund" (five per cent) and 
a common " guarantee fund" (five per cent), and by 
making the issues a lien on all assets of the bank 
issuing them, besides by assessment making all of the 
banks in the system responsible for a deficit. The 
money provision was eminently " sound." 

The " soundness" of the commercial-credit system 
was not so well guarded. No additional capital 
strength was to be given to the commercial banks 
undertaking to carry this new financial load. On 
the other hand the capital requirements of banks 
were to be distinctly lowered. The bond deposits 
to be originally made were only twenty-five per cent 
of the capital, while the banks were to be permitted 
to issue to the full amount of " unimpaired capital." 
Banks were to But these original deposits might ulti- 
be greatly mately be withdrawn. The only 

banking capital that was to be set 
aside for note redemption was the five per cent fund, 
which was not to be counted as a part of the reserve 
for the redemption of credit-accounts. 

Elasticity in the currency was to be attained by 

taxing all notes issued above sixty per cent of the 

capital of the bank issuing them at six per cent. In 

other words, sixty per cent of the bank-notes was 

_. . . intended to supply the permanent de- 

Elastiaty , r . , . ,. , 

mand for a circulating medium, and 

forty per cent of the authorized issue was to serve 

to supply extraordinary demands — this emergency 



EFFORTS TO MAKE FURTHER ADAPTATIONS 277 

currency to be retired through the autonomous 
action of the tax after the extraordinary demand had 
passed. But for ultimate redemption in standard 
money, only twenty-five per cent of the banking re- 
serve was to be in coin, and this might be silver. 
Such a National currency provision needs no further 
comment. That such a measure would not in- 
crease the elasticity of bank credit-accounts is cer- 
tain. Under circumstances similar to those that 
had prevailed when the Treasury found difficulty in 
meeting its outstanding obligations, it is to be fairly 
presumed that our National credit would receive a 
more serious shock than in 1893 and the years 

following. 

The McCleary Bill 

Closely following the Commission Bill came the 
McCleary measure, introduced into the House May 
11, 1898. In this we again have reflected the spirit 
of the campaign of 1896. In its Treasury features it 
was almost a direct copy of the Commission Bill. By 
its provisions the several forms of issues of the 
Credit-money to Treasury were specifically recognized 
be made sound by as obligations of the Government to 
gold redemption pay gQ]A Qn demand) and all forms rf 

money-issue were to be made interchangeable. By 
this the financial needs of the Treasury for redemp- 
tion of its credit-issues were also to be independently 
capitalized. A division of Issue and Redemption 
was to be created, similar to that provided for in the 



278 THE BANK AND THE TREASURY 

Act of 1900; this was to be made guardian of the 
fund created to protect money obligations. The 
reserve was to be equal to twenty-five per cent of all 
legal- tender notes, and silver Treasury notes of 1890, 
and five per cent of all silver coinage. The principle 
of shifting the burden, however, was not abandoned. 
National banks were to be permitted to obtain notes 
on deposit of bonds as at present, the provision being, 
however, that the bonds might be gradually with- 
drawn. In addition, they would be required to issue 
"reserve notes" to an amount equal to at least 
twenty-five per cent of their capital, on deposit of an 
equal amount of United States notes. They were to 
receive as a bonus the privilege of issuing an equal 
amount of "national currency notes" not to exceed 
forty per cent of their capitalization — the total 
amount of note-issues (bank-notes, reserve notes, and 
currency notes) not to exceed one hundred per cent 
of the unimpaired capital. While, therefore, the 
Treasury obligations were clearly recognized, and 
adequate provision was made for their redemption, 
every inducement was given to the banks to grad- 
ually assume the Government's monetary responsi- 
bilities. These bank issues were also to be rendered 
"sound" by all of the methods before suggested. 

As with the measures previously proposed, the 
McCleary Bill was one which would have operated 
to weaken capital support to bank accounts — the 
principal form of funds with which business is done. 



EFFORTS TO MAKE FURTHER ADAPTATIONS 279 

The amount of direct capital requirement for support 

of money-issues, however, was increased, and to this 

extent it was superior to the several 
Results on sound ■> ■. i -r» r 

banking plans previously proposed. Before 

issues might be had, the bank must 
invest at least sixty per cent of the amount of notes 
applied for in collateral securities or Government 
notes for deposit, as a fund for final redemption. 
The bank with $100,000 capital could not issue 
$100,000 of notes unless it first purchased $20,000 of 
bonds, and $40,000 of United States notes. Its 
available "cash" from such a capitalization, there- 
fore, would not exceed $140,000; and of this only 
$40,000 (the emergency circulation) would be a prior 
lien on the other assets — that is to say, $60,000 of 
capital-resources would be left for the final redemp- 
tion of current banking accounts. The notes could 
not wipe out the entire capital and leave stranded the 
holders of accounts. In addition to these provi- 
sions, fifty per cent of the "money-reserves" of the 
bank was required to be in gold (double the amount 
of coin required by the Commission Bill), thus pre- 
venting gold exportation with increasing credit-issues. 
A very definite provision was also made for elas- 
ticity in the money supply. All issues over eighty 
per cent of capitalization were to be taxed at the rate 
of one -half of one per cent per month or six per cent 
per annum. This would have been adequate to 
meet all usual fluctuations in money-demand. As a 



280 THE BANK AND THE TREASURY 

funding measure its weakness lay in decreasing 
rather than increasing the capital support to be pro- 

Elasticity pro- vided for in the banking business — a 
vided for in the capital support which had proved too 
currency weak to sustain credit-accounts in 

time of financial strain. 

The Gage Bill 

Secretary Gage's measure for currency reform was 
the immediate forerunner of the Currency Act of 
1900, which adequately capitalized the Treasury to 
protect its credit-issues. It contained the provisions 
proposed by the Monetary Commission Bill and the 
McCleary Bill for the erection of a special division of 
Capitalization oj tne Treasury to be known as the 
currency de- ''Division of Issue and Redemption.' ' 
To this division was to be transferred 
$125,000,000 in gold, to be held in trust for the re- 
demption of Treasury credit-issues, and a lien was to 
be given on the general fund to reimburse the reserve 
fund for redemptions made. It was deficient, how- 
ever, in specific provisions for support of the general 
fund. 

Secretary Gage still clung to the idea of ultimately 
relieving the Treasury from credit-money functions 
by enlarging the bank-note circulation and shifting 
the financial burdens of the Government on the 
banks. To the end of encouraging the banks to 
supply the ordinary money-demands, they were to be 



EFFORTS TO MAKE FURTHER ADAPTATIONS 281 

permitted to issue to the minimum amount of fifty 
per cent of their capital, on deposit of bonds, United 

Bank issues to States notes > Treasury notes of 1890, 
supplant Treas- and silver certificates, and after which 
ury issues minimum amount had been reached, 

to permit an additional issue of twenty-five per cent 
of such deposits without further collateral security 
— i.e., two-thirds of the issues were to be collaterally 
secured. The total issues were not to exceed the 
amount of the paid-up capital. For the current re- 
demption of bonds a ten per cent fund was to be 
deposited with the Treasurer. For final redemption 
a guarantee fund was provided for by taxing the 
" unsecured circulation" two per cent per annum; a 
lien was to be given on the general assets of the bank 
of issue ; and the notes were to be guaranteed by the 
Government. As in the other plans proposed, the 
notes were to be "sound" beyond question. 

As a banking measure it was the same in kind as 
those which had preceded, but better in a degree, in 
that it required the banks to capitalize 
Banking features a minimum of sixty-six per cent of the 
gross amount of issues by collateral 
deposits, and a ten per cent redemption fund; they 
were also required to create a surplus fund for the 
guarantee of ultimate payment of notes. While it 
was a stronger banking measure than the several 
previous propositions, it was weaker than the National 
Bank Act. No provision was made for increasing 



282 THE BANK AND THE TREASURY 

capitalization, while the banks were to be encouraged 
to do a larger credit business proportionate to capital 
invested — to further encumber the resources used 
for current banking equipment. It is a logical con- 
clusion that if such a measure had become a law, 
whatever could have been gained by increasing 
elasticity in the money circulation would be more 
than lost in decreased ability to extend business 
accommodations. 

The Currency Act of 1900 

This was the first bill which did not confuse the 
functions and obligations of the two independently 
organized national funding institutions — the Treas- 
ury and the National bank. It was a measure di- 
rectly in line with the evolution of American financial 
ideals of the century. The people had given unmis- 
takable expression to opinion with respect to the 
Treasury and its obligations — since the passage of 
the National Bank Act they had not directly con- 
sidered the bank. Four years after the election of 
1896 the first positive legislation pertaining to the 
currency was spread on the statute books, reaffirming 
the gold standard law of 1873, and providing for the 

Credit-issues of the redemption of credit-money-issues in 

Tveasuw Ttiade 

sound by adequate g° ld - A negative measure had pre- 

capitalization viously passed repealing the Sherman 
Act, thereby relieving the Treasury from increasing 
burdens in the form of silver obligations, but the 



EFFORTS TO MAKE FURTHER ADAPTATIONS 283 

Act of 1900 undertook adequately to capitalize the 
redemption demands of the Treasury. At that time 
there were outstanding about $1,000,000,000 of credit- 
issues. To provide for current redemptions of the 
different forms of monetary obligations, the device 
suggested by the Monetary Commission, by the 
McCleary Bill and by the Gage Bill was adopted, 
creating a special department of the Treasury to be 
known as the Division of Issue and Redemption, and 
to this was transferred $150,000,000 of gold coin 
(about fifteen per cent of the credit-issues to be re- 
deemed). To guarantee ultimate redemption of all 
Treasury obligations, the Secretary was enjoined at 
all times to maintain the value of issues at a par with 
gold, and as a means to this end gave to the Division 
of Issue and Redemption a first lien on all revenue 
funds of the Government ; collateral to this, the Law 
placed in the hands of the Secretary of the Treasury 
the power to make unlimited use of the credit of the 
Government to procure gold to replenish the general 
fund whenever such might be found necessary to 
reimburse the Division of Issue for redemptions. 
The effect of this Act was to fortify the Treasury 
issues against all possibility of discredit, and to place 
behind the public institution of credit-money circu- 
lation the united revenue and loan powers of the 
nation. 



284 THE BANK AND THE TREASURY 

The Fowler Bills of 1902 and 1903 

After the enactment of the gold standard currency 
Law of 1900 the two bills which take title from the 
Chairman of the Committee on Currency and Bank- 
ing come as voices from the tomb. The Currency 
Act of 1900 was in direct line with the development 
of our funding system and had finally established the 
credit currency of the country on a financially sound 
basis. There remained only two other steps to be 
taken to perfect the adaptation to our funding needs, 
and these were both primarily banking questions: 
(1) How may the banks obtain money to meet the 
extraordinary money-demands of their customers; 
and (2) how may they equip themselves to expand 
their credit to meet fluctuating demands for credit- 
accommodation and at the same time maintain safe 
proportionate money-reserves for current redemp- 
tions. Legislation which would accomplish these 
results must be banking legislation. To attain either 
of these results would require that provision be made 
for a capitalized reserve which would be adequate to 
obtain the cash necessary both for increasing the 
money circulation and for maintaining increased 
credit-accounts. That such reserve must be a capital 
reserve follows for the reason that a reserve of assets 
acquired in exchange for bank-credit would defeat 
the very purpose for which it was held — on con- 
version of such a reserve commercial accommoda- 



EFFORTS TO MAKE FURTHER ADAPTATIONS 285 

tions would be reduced instead of expanded. The 
Fowler Bills referred to made no provision for either 
of these desirable banking results. They attempt 
again to solve the " sound money" problem which 
was already solved by the Currency Act of 1900. 
The excuse for reopening the money situation is to 
provide " elasticity." But in the measures proposed 
the character of the demand, as well as the necessary 
means successfully to meet the demand, were over- 
looked. The first principle of business, so far as 
obtaining money is concerned, is to have something 
to offer for it. The measures here introduced would 
permit the banks when in straits to obtain money 
from the Division of Issue and Redemption to meet 
demands on their own credit-accounts without hav- 
ing anything to pledge for it. That is, the banks 
would be relieved from doing for their credit what 
the United States Treasury had found it necessary to 
do — to capitalize their redemption demands, and, in 
lieu of the current redemption reserve proving too 
small, to have another fund or reserve which it might 
draw upon for collateral support. A large part of 
Mr. Fowler's Bills was designed to break down the 
Treasury system now established on a sound basis, 
and in lieu of the Treasury reserve to do what many 
others had proposed — to secure the bank-note by 
depriving the bank depositor of his security. It 
cannot be thought that such a system will ever add 
to the "soundness" (the capital strength) of our 



286 THE BANK AND THE TREASURY 

banking institutions, nor that increased banking 
weakness can contribute to " elasticity" in bank- 
credit. 

The Payne Bill, 1903 

The measures proposed by Mr. Payne in the House 
and by Mr. Aldrich in the Senate are steps in the 
right direction. The principle here invoked is one 
that carries with it the largest possibilities for elas- 
ticity, both in the currency and in bank-credit, if 
carried to its logical conclusion. The Bill proposed to 
place in the hands of the Secretary of the Treasury 
the power to receive from banks invested capital 
reserves (" bonds of the United States, bonds or 
other interest-bearing obligations of any State of the 
United States, or any legally authorized bonds for 
municipal purposes . . . which for a period of ten 
years previous to such deposit has not defaulted 
. . . and the first mortgage bonds of any railroad 
company which had paid dividends of not less than 
four per centum per annum regularly and continu- 
ously on its entire capital stock for a period of not 
less than ten years") as collateral for loans. The 
banks were to be encouraged to carry surplus capital- 
resources in the form of gilt-edge securities. A 
bank, therefore, which is not suffering from under- 
capitalization, which has not already increased its 
credit-obligations beyond a safe proportion to total 
unimpaired capital (capital available for redemp- 
tions) even though its cash reserve provided for 



EFFORTS TO MAKE FURTHER ADAPTATIONS 287 

current redemptions were threatened, could obtain 
the cash needed. If it had an invested capital-reserve 
to fall back upon it might immediately convert this 
into cash at the Treasury. Assuming this measure 
had passed, that it had been supplemented by a law 
which restrained banks from incurring credit liabili- 
ties to exceed three or four times its unimpaired 
capital, and that it were also required to keep this 
redemption capital " reserved" in the form of cash, 
or investments such as the Treasury would receive, 
under such circumstances the bank would be re- 
quired to capitalize its customers' greatest needs. 
It would at times of low credit-demand have a capital 
reserve largely in excess of the requirement, the sur- 
plus of which could be invested. This would place 
in the hands of the banks the power to increase the 
money circulation and credit-accommodations at any 
time an increase in money or credit-funds was 
needed, and with entire safety to the community. 
By such an extension of the principle we would have 
attained for our funding system both elasticity and 
increased financial stability. 

The measure proposed by Mr. Payne is essentially 
an amendment of the Bank Act. If the amendment 
were so changed as to permit the issue of Treasury 
notes (whether they be in the form of bank-notes, 
greenbacks, currency certificates, or what not), as 
well as to deposit (loan) its revenue surplus against 
such collaterals, then the question of general Treas- 



288 THE BANK AND THE TREASURY 

ury condition would be completely eliminated. Fur- 
ther, if interest were to be charged on such loans at 
the rate of, not one and one-half per cent, as pro- 
posed, but five or six per cent, the notes issued — 
whatever their form — would be promptly retired 
when they were not needed for circulation. 

The Payne measure (together with an extension of 
the same principle to include increased capitalization 
of banking needs, and a proper interest charge on 
emergency issues) would do for bank credit-funds 
and for the business of banking (selling commercial 
credit-accommodations at a profit) what the Cur- 
rency Law of 1900 has done for our credit- money. 
An adequate capitalization of bank credit-accounts 
would complete the evolution in the American fund- 
ing system, adapting it to the nation's fluctuating 
business needs. The bills introduced by Senators 
Aldrich, Knox, Culberson, and Hayburn are all 
measures directed toward this end, although they all 
fall short of the mark. The significant measures at 
present before Congress are included in the appendix. 



APPENDIX OF DOCUMENTS 



"THE BALTIMORE PLAN" OF CURRENCY 
REFORM 

1896 

OUTLINES OF THE PLAN 

{Digest taken front "Sound Currency") 

Section i. The provision of the National Bank Act re- 
quiring the deposit of bonds to secure circulating notes here- 
after issued, shall be repealed. 

Sect. 2. Allow the banks to issue circulating notes to the 
amount of 50 per cent of their paid up, unimpaired capital, 
subject to a tax of one-half of 1 per cent per annum upon the 
average amount of circulation outstanding for the year; and an 
additional circulation of 25 per cent of their paid-up, unim- 
paired capital, subject both to the tax of one-half of 1 per 
cent per annum and to an additional heavy tax per annum 
upon the average amount of such circulation outstanding 
for the year; said additional 25 per cent to be known as "emer- 
gency circulation." 

Sect. 3. The tax of one-half of 1 per cent per annum upon 
the average amount of circulation outstanding shall be paid 
to the Treasurer of the United States as means of revenue, 
out of which the expense of the office of the Comptroller of 
the Currency, the printing of circulating notes, etc., shall be 
defrayed. 

The excess over one-half of 1 per cent of the tax imposed 
upon the "emergency circulation" shall be paid into the 
"guarantee fund," referred to in Sect. 6. 

Sect. 4. The banks issuing circulation shall deposit and 
maintain with the Treasurer of the United States a "redemp- 

[291] 



292 APPENDIX 

tion fund" equal to 5 per cent of their average outstanding 
circulation, as provided for under the existing law. 

Sect. 5. The redemption of the notes of all banks, solvent 
or insolvent, to be made as provided for by the existing law. 

Sect. 6. Create a "guarantee fund" through the deposit 
by each bank of 2 per cent upon the amount of circulation 
received the first year. Thereafter impose a tax of one-half 
of 1 per cent upon the average amount of outstanding circu- 
lation, the same to be paid into this fund until it shall equal 
5 per cent of the entire circulation outstanding, when the col- 
lection of such tax shall be suspended, to be resumed when- 
ever the Comptroller of the Currency shall deem it necessary. 

The notes of insolvent banks shall be redeemed by the 
Treasurer of the United States out of the " guarantee fund," 
if it shall be sufficient, and, if not sufficient, then out of any 
money in the Treasury, the same to be reimbursed to the 
Treasury out of the " guarantee fund," when replenished, 
either from the assets of the failed banks or from the tax afore- 
said. 

National banking associations, organized after this plan 
shall have gone into operation, may receive circulation from 
the Comptroller of the Currency upon paying into the "guar- 
antee fund" a sum bearing the ratio to the circulation applied 
for and allowed that the "guarantee fund" bears to the total 
circulation outstanding, and to be subject to the tax of one- 
half of 1 per cent per annum, as called for by the Treasurer 
of the United States for the creation and maintenance of this 
fund. 

No association or individual shall have any claim upon any 
part of the money in said "guarantee fund," except for the 
redemption of the circulating notes of any insolvent national 
banking association. Any surplus or residue of said "guar- 
antee fund" which may be hereafter ascertained or deter- 
mined by law shall inure to the benefit of the United States. 

Sect. 7. The Government shall have a prior lien upon the 
assets of each failed bank and upon the liability of shareholders, 
and for the purpose of restoring the amount withdrawn from 



APPENDIX 293 

the "guarantee fund" for the redemption of its circulation, 
not to exceed, however, the amount of the failed bank's out- 
standing circulation after deducting the sum to its credit in 
the "redemption fund" (Sect. 4) already in the hand of the 
Treasurer of the United States. 

Sect. 8. Circulation can be retired by a bank at any time 
upon depositing with the Treasurer of the United States law- 
ful money in amount equal to the sum desired to be with- 
drawn, and immediately upon such deposit the tax indicated 
in Sects. 2, 3 and 6 shall cease upon the circulation so retired. 

Sect. 9. In the event of the winding up of the business of 
a bank by reason of insolvency, or otherwise, the Treasurer 
of the United States, with the concurrence of the Comptroller 
of the Currency, may, on the application of the directors, or 
of the liquidator, receiver, assignee, or other proper official, 
and upon being satisfied that proper arrangements have been 
made for the payment of the notes of the bank and any tax 
due thereon, pay over to such directors, liquidator, receiver, 
assignee, or other proper official, the amount to the credit of 
the bank in the "redemption fund" indicated in Sect. 4. 



"THE CARLISLE PLAN" 

1896 

Be it enacted by the Senate and House 0} Representatives of 
the United States oj America in Congress assembled: 

That so much of all acts and parts of acts as require or 
authorize the deposit of United States bonds to secure circu- 
lating notes issued by national banking associations, or as 
require such associations to deposit or keep on deposit United 
States bonds for any purpose except as security for public 
money, be, and the same are hereby, repealed as to associa- 
tions taking circulation under this Act; and notes issued under 
this Act shall not contain the statement that they are so secured. 

Sect. 2. That any national banking association .... may 



294 APPENDIX 

take out circulating notes to an amount not exceeding 75 per 
centum of its paid-up and unimpaired capital upon deposit- 
ing with the Treasurer of the United States currency certifi- 
cates .... or United States legal-tender notes, including 
Treasury notes .... and other lawful money of the United 
States, at the discretion of the Secretary of the Treasury, as 
a guaranty fund equal to 30 per centum of the circulating 
notes applied for. The association making such deposit shall 
be entitled to receive from the Comptroller of the Currency 
circulating notes in blank, registered and countersigned as 
provided by law; and all such notes shall constitute, and are 
hereby declared to be, a first lien upon all the assets of the 
association issuing the same. . . . 

Sect. 4. That each national banking association shall re- 
deem its notes at par on presentation at its own office and at 
such agencies as may be designated for that purpose by the 
Comptroller of the Currency; and whenever such association 
desires to retire the whole or any part of its circulation, the 
notes to be retired shall be forwarded to the Comptroller of 
the Currency for cancellation, and thereupon a sum equal to 
30 per centum of such cancelled notes shall be returned to 
the association, in lawful money of the United States. . . . 

Sect. 5. That in order to provide a safety fund for the 
prompt redemption of the circulating notes of failed national 
banking associations each such association .... shall pay 
the Treasurer of the United States, .... a tax of one-fourth 
of 1 per centum for each half year upon the average amount 
of its circulating notes outstanding, .... until the said fund 
amounts to a sum equal to 5 per centum upon the total amount 
of such national bank notes outstanding, and thereupon the 
collection of said tax shall be suspended All circulat- 
ing notes of failed national banks taken out under this Act 
not redeemed on presentation to the Treasury of the United 
States, or an assistant treasurer of the United States, shall 
bear interest at the rate of 6 per centum per annum from the 
date of suspension of the bank until thirty days after public 
notice has been given that funds are on hand for their redemp- 



APPENDIX 295 

tion, and such notes shall constitute a first lien upon all moneys 
thereafter received into the safety fund. 

Sect. 7. That every national banking association hereto- 
fore organized and having bonds on deposit to secure circu- 
lation may withdraw such bonds upon the deposit of lawful 
money of the United States, as now provided by law ; and there- 
after such association may take out circulation under this 
Act and be entitled to all rights, privileges, and immunities 
herein conferred. 

Sect. 9. That the Secretary of the Treasury may, in his 
discretion, use from time to time any surplus revenue of the 
United States in the redemption and retirement of United 
States legal- tender notes, and notes issued under the Act of 
July 14, 1890, but the amount of such notes retired shall not 
in the aggregate exceed an amount equal to 70 per centum of 
the additional circulation taken out by national banks and 
State banks under the provisions of this Act 

Sect. 10. That the use of circulating notes of and above 
the denomination of ten dollars issued by a banking corpora- 
tion duly organized under the laws of any State, and which 
transacts no other than a banking business, shall be exempt 
from taxation under the laws of the United States when it is 
shown to the satisfaction of the Secretary of the Treasury 
and the Comptroller of the Currency: 

First — That such bank has at no time had outstanding its 
circulating notes in excess of 75 per centum of its paid-up and 
unimpaired capital; 

Second — That its stockholders are individually liable for 
the redemption of its circulating notes to an amount equal to 
the par value of the stock owned by them ; . . . . 

Third — That the circulating notes constitute by law a 
first lien upon all the assets of the bank; 

Fourth — That the bank has at all times kept on deposit 
with an officer of the State, authorized by law to receive and 
hold the same, a guaranty fund in currency certificates issued 
under Section 5193 of the Revised Statutes of the United 
States, or United States legal-tender notes, including Treasury 



296 APPENDIX 

notes of 1890, equal to 30 per centum of its outstanding cir- 
culating notes ; and 

Fifth — That it has promptly redeemed its notes at par on 
demand at its principal office, or at one or more of its branch 
offices, if it has branches. 

Whenever the Secretary of the Treasury and the Comptroller 
of Currency shall be satisfied that any banking corporation 
duly organized under the laws of any State, and which trans- 
acts no other than a banking business as provided in this 
section, has been incorporated under the laws of the State 
in which it is located, and that such laws require 

First — That its stockholders shall be individually liable 
for the redemption of its circulating notes to an amount equal 
to the par value of the capital stock owned by them; 

Second — That the circulating notes thereof shall constitute 
a first lien upon all the assets of the bank; and, 

Third — That such bank shall keep on deposit at all times 
with an official of the State authorized by law to receive and 
hold the same, a guaranty fund as required in the fourth para- 
graph of this section. There shall thereupon issue to said 
bank a certificate to that effect. Said bank may then issue 
its notes .... 



FOWLER BILL OF MARCH 15, 1897 

Be it enacted by the Senate and House of Representatives of 
the United States of America in Congress Assembled: 

That there shall be and there is hereby created and estab- 
lished a Department of Finance, which shall have entire and 
exclusive control and supervision of all national debts, their 
right to take out secured circulation and issue their notes. 

Sect. 2. That there shall be three ministers of finance, 
who shall take the place of the Comptroller of the Currency 
and constitute a board of finance; and said board of finance 
shall conduct the said Department of Finance 

Sect. 3. That any national bank now doing business, or 



APPENDIX 297 

any other financial institution doing a similar business, .... 
may, in accordance with existing law, .... organize upon 
the following terms and conditions: 

If any corporation or association of persons described as 
aforesaid shall deposit with the United States Government 
any of the United States bonds now outstanding, or any that 
may be hereafter issued which, at their stated value as herein 
set forth, .... circulation known as United States Govern- 
ment bond notes shall be issued to said corporation .... 

(a) That the United States Government bonds now out- 
standing shall be received at the following prices, to wit: 

2s, reg Q, Mar. 954 

4s, 1907, reg Q, Jan. 109J 

4s, 1907, coup Q, Jan. 1 ioj 

4s, 1925, reg Q, Feb. 120J 

4s, 1925, coup Q, Feb. 120J 

5s, 1904, reg Q, Feb. 113I 

5s, 1904, coup Q, Feb. 113! 

6s, cur'cy, '98, reg J- & J- io2§ 

6s, cur'cy, '99, reg J- & J- 105 

4s, (Cher), 1897, reg March 102 

4s, (Cher), 1898, reg March 102 

4s, (Cher), 1899, reg March 102 

and that from and after the passage of this Act said bonds shall 
be received upon the same income basis, respectively. 

(b) All banks organized under this Act shall take out for 
issue United States Government bond-notes in proportion to 
their respective capital .... and each bank shall pay into 
the United States Treasury one-fourth of 1 per centum per 
annum upon the notes so taken out for issue as a part of the 
fund to be created and known as " United States National- 
Bank Note Redemption Fund." 

Sect. 5. That at the same time that said corporation, if 
located in a reserve city, shall deposit United States Govern- 
ment bonds as aforesaid it shall also deposit with the United 
States Government United States legal-tender notes or gold 



298 APPENDIX 

certificates, or both, of such an amount that it, together with 
the gold said corporation has on hand, will equal 15 per 
centum of its deposits ; and the United States Government shall 
deliver to said corporation gold coin in lieu of said legal- 
tender notes and said gold certificates. Said corporation shall 
also deposit at the same time with the United States Govern- 
ment United States Treasury notes or United States silver 
certificates, at the option of said ministers, or both, which, 
with the silver coin then held by said corporation, shall amount 
to 10 per centum of its deposits, and the United States Govern- 
ment shall deliver to said corporation in lieu thereof silver coin 
of an equal amount; and said legal-tender notes, gold certifi- 
cates, Treasury notes, and silver certificates shall be thereupon 
cancelled. Said corporation shall thereafter keep as a reserve 
25 per centum of its deposits in the following kinds of money: 
At least 60 per centum of said reserve shall be in gold coin, 
and the remaining 40 per centum of said reserve may be in 
silver coin or United States Government bonds notes: Pro- 
vided, however, That in lieu of one-half of such reserve cash 
on deposit, subject to check, may be held in reserve cities. 

Sect. 6. That at the same time the said corporation, if 
located outside a reserve city, shall deposit United States 
Government bonds as aforesaid, it shall also deposit with the 
United States Government United States legal-tender notes, 
or gold certificates, or both, of such an amount that it, together 
with the gold coin said corporation has on hand, will equal 
9 per centum of its deposits; and the United States Govern- 
ment shall deliver to said corporation gold coin in lieu of said 
legal-tender notes and said gold certificates. Said corporation 
shall also deposit at the same time with the United States 
Government United States Treasury notes or United States 
silver certificates, at the option of said ministers, or both, 
which, with the silver coin then held by said corporation, shall 
amount to 6 per centum of its deposits, and the United States 
Government shall deliver to said corporation in lieu thereof 
silver coin of an equal amount; and said legal-tender notes, 
gold certificates, Treasury notes, and silver certificates shall 



APPENDIX 299 

be thereupon cancelled. Said corporation shall thereafter 
keep as a reserve 1 5 per centum of its deposits in the follow- 
ing kinds of money: At least 60 per centum of said reserve 
shall be in gold coin, and the remaining 40 per centum of 
said reserve may be in silver coin, or United States Govern- 
ment bond notes: Provided, however, That in lieu of one- 
half of such reserve cash on deposit, subject to check, may be 
held in reserve cities. 

Sect. 7. That the United States shall not pay out or reissue 
any United States legal-tender notes or gold certificates from 
and after the 1st day of January, eighteen hundred and ninety- 
eight, but the same when received shall be cancelled and 
destroyed; and further that the United States Government 
shall not pay out, issue or reissue any United States Treasury 
notes or silver certificates from and after the 1st day of January, 
eighteen hundred and ninety-nine, but the same when re- 
ceived shall be cancelled and destroyed. 

Sect. 8. That any corporation organized under this Act 
may .... issue its own circulation, which shall be furnished 
by the United States Government, and be known as United 
States national-bank notes. Said United States national-bank 
notes shall be issued in denominations of ten dollars and mul- 
tiples thereof, and shall be a first lien upon the assets of the 
bank issuing the same, and also upon the liability of the stock- 
holders, and may be issued only in the following manner and 
upon the following conditions: 

First — Every bank issuing United States national-bank 
notes shall at all times maintain against the amount of such 
notes outstanding a reserve corresponding to that required 
against its deposits. 

Second — Any bank that shall have complied with this law 
may, with the consent and under the supervision and control 
of the board of finance, issue an amount of United States 
national-bank notes equal to 20 per centum or one-fifth of its 
paid-up and unimpaired capital, and shall pay upon such an 
amount thereof as may be outstanding at any time a tax at the 
rate of 1 per centum per annum. 



300 APPENDIX 

Third — Said bank may issue a second amount of such 
notes, equal to 20 per centum or one-fifth of its paid-up and 
unimpaired capital, and shall pay upon such an amount thereof 
as may be outstanding at any time a tax at the rate of 2 per 
centum per annum. 

Fourth — Said bank may issue a third amount of notes 
equal to 20 per centum or one-fifth of its paid-up and unim- 
paired capital, and shall pay upon such an amount thereof as 
may be outstanding at any time a tax at the rate of 4 per 
centum per annum. 

Fifth — Said bank may issue a fourth amount of notes 
equal to 20 per centum of its paid-up and unimpaired capital, 
and shall pay upon such an amount thereof as may be out- 
standing at any time a tax at the rate of 6 per centum per 
annum. 

Sixth — Said bank may issue a fifth amount of notes, equal 
to 20 per centum or one-fifth of its paid-up and unimpaired 
capital, and shall pay upon such an amount thereof as may be 
outstanding at any time a tax at the rate of 8 per centum per 
annum. 

Seventh — If the amount of United States national-bank 
notes issued by any bank shall exceed at any time the paid-up 
and unimpaired capital of said bank, a tax at the rate of 10 
per centum per annum shall be paid by said bank on such 
excess. 

Eighth — That said ministers of finance are hereby author- 
ized and empowered to suspend one-half of said tax upon any 
one or all of the said several issues of United States national- 
bank notes at any time after nineteen hundred and ten, and 
at any time after nineteen hundred and twenty said ministers 
of finance are further authorized and empowered to suspend 
any portion of the tax then remaining except the 10 per centum 
tax referred to in paragraph seven. 

Sect. 9. That all taxes so paid to the Government upon 
said United States Government bond notes and said United 
States national bank notes shall constitute and be known as 
the " United States National-bank Note Redemption Fund," 



APPENDIX 301 

and be held exclusively for the redemption, first, of the United 
States Government bond notes; second, for the United States 
national-bank notes in the event of the liquidation of any bank 
organized under this law: Provided, however, That when said 
" redemption fund" shall exceed 5 per centum of both the 
United States Government bond notes and the United States 
national-bank notes such excess shall belong to the United 
States Government, and may be used by it to defray its general 
expenses. 

Sect. 13 Second — That under such regulations 

and restrictions as shall be established by the said ministers 
of finance, national banks organized under this Act may 
establish branch banks by and with the consent of said min- 
isters, such branch banks to have the right to receive deposits, 
make loans, grant discounts and buy and sell exchange, but in 
no case to be permitted to issue circulating notes other than 
those of the parent bank. It shall in all respects be considered 
as a part of the parent bank and in each case where such 
branches are maintained the ministers of finance shall receive 
in the reports of the central bank a statement, properly sworn 
to and attested, of the condition of its branches. 

Sect. 14. First — That in the event of the liquidation of 
any national bank organized under this Act the United States 
Government shall redeem upon presentation, after notice given 
as herein provided, any of said United States Government 
bond notes or said United States national-bank notes, re- 
imbursing itself for the full amount thereof out of the assets of 
said bank, and distribute the remaining assets among the de- 
positors and all others having claims in the same manner as 
now provided by law. 

Second — That from the time of the suspension of said bank 
up to the date set by said ministers of finance for the redemp- 
tion of said United States national-bank notes, they shall bear 
interest at the rate of 5 per centum per annum. Such notice 
shall be given in some newspaper printed in the clearing-house 
city where said notes were cleared ; but nothing herein contained 
shall be construed to impose any liability upon the Govern- 



302 APPENDIX 

ment of the United States, or any of its representatives, beyond 
the amount available from time to time out of said "United 
States National-bank Note Redemption Fund." 

Sect. 15. First — That any bank organized under this 
Act may at any time after nineteen hundred and five, with the 
consent of the ministers of finance, insure its depositors against 
loss by paying into the United States Treasury 1 per centum 
upon the average balance of deposits of the preceding fiscal 
year, and one-half of 1 per centum upon the average annual 
balances thereafter until the amount so paid into the United 
States Treasury by said bank shall amount to 5 per centum 
of the average balance of said bank for the last preceding year, 
and that said ministers of finance may then suspend said tax 
for the time being. If the deposits of said bank shall increase, 
or for any reason the amount of the insurance fund to the 
credit of said bank shall be less than 5 per centum of the 
deposits, said ministers may reimpose said tax of one-half of 
1 per centum upon the deposits of said bank; and if said bank 
shall fail to pay such tax at any time after the payment of said 
1 per centum the amount already paid by said bank shall be 
forfeited to the United States Government and the insurance 
of said depositors shall thereupon cease. 

Second — That the amounts of money so received shall 
constitute and be known as the "Depositors' Insurance Fund." 

Sect. 21. That it shall be unlawful for any national bank 
to engage in the promotion of any enterprise, or to loan the 
funds of the bank upon the bonds or securities of incomplete 
and partially developed projects of any kind, such as partially 
constructed railroads, street-car lines, electric-light, gas, water, 
mining, manufacturing, or irrigation plants. 



APPENDIX 303 

INDIANAPOLIS MONETARY COMMISSION BILL 

January 6, 1898 
Be it enacted, etc. : 

Sect. 4. That there is hereby created a division in the 
Treasury Department, to be known as the Division of Issue 
and Redemption, under the charge of an Assistant Treasurer 
of the United States, who shall be appointed by the President, 
by and with the advice and consent of the Senate. 

Sect. 5. That to the Division of Issue and Redemption shall 
be committed all functions of the Treasury Department per- 
taining to the issue and redemption of notes and certificates, 
and to the exchange of coins, and the said Division of Issue and 
Redemption shall have the custody of the Bank Note Guaranty 
Fund and of the Redemption Funds of the national banking 
associations, and shall conduct the operations of redeeming 
the circulating notes of national banking associations, as pre- 
scribed by law 

Sect. 6. That a reserve shall be established in the Division 
of Issue and Redemption aforesaid, by the transfer to it by 
the Treasurer of the United States from the general funds of 
the Treasury of an amount of gold, in coin and bullion, equal 
to 25 per centum of the amount of both United States notes 
and Treasury notes issued under the Act of July 14, 1890, 
outstanding, and a further sum in gold equal to 5 per centum 
of the aggregate amount of the coinage of silver dollars. . . . 

Sect. 7. That it shall be the duty of the Secretary of the 
Treasury to maintain the gold reserve in the Division of Issue 
and Redemption aforesaid at such sum as shall secure the 
certain and immediate redemption of all notes and exchange 
of all silver dollars presented, as hereinafter provided for, and 
the preservation of public confidence; and for this purpose he 
shall from time to time transfer to the Division of Issue and 
Redemption any funds in the Treasury not otherwise appro- 
priated, and in addition thereto he is hereby authorized to 
issue and sell, whenever it is in his judgment necessary to the 
ends aforesaid, bonds of the United States, bearing interest at 



304 APPENDIX 

a rate not exceeding 3 per centum per annum payable in gold 
coin at the end of twenty years, but redeemable in gold coin 
at the option of the United States after one year; and the pro- 
ceeds of all such sales shall be paid into the Division of Issue 
and Redemption for the purposes aforesaid. 

Sect. 16. That, to provide for any temporary deficiency 
which may at any time exist in the Treasury of the United 
States, the Secretary of the Treasury be and he is hereby 
authorized, at his discretion, to issue certificates of indebted- 
ness of the United States 

Sect. 18. That any national banking association organized 
under the laws of the United States shall, if its capital be 
wholly paid up and unimpaired, be entitled to receive from 
the Comptroller of the Currency circulating notes of denomi- 
nations hereinafter provided, in blank, registered and counter- 
signed as provided by law, to an amount not exceeding the 
amount of such paid-up and unimpaired capital, after deduct- 
ing therefrom its investment in real estate: Provided, That 
during the five years first succeeding the passage of this Act, 
any national banking association receiving from the Comp- 
troller of the Currency circulating notes in blank under the 
provisions of this Act, shall maintain on deposit with the 
Treasurer of the United States, bonds of the United States 
to an amount, at a valuation computed as hereinafter pre- 
scribed, equal to that of the circulating notes so received, when- 
ever such notes shall not exceed 25 per centum of the capital 
stock. And for each succeeding year after the expiration of 
five years from the passage of this Act, the amount of bonds 
required to be deposited before issuing notes in excess of such 
deposit shall be decreased by 20 per centum of the original 
25 per centum of capital stock hereinbefore specified, and 
from and after the expiration of ten years from the passage 
of this Act no such bond deposit shall be required. And no 
further deposit of bonds shall be required than is herein pre- 
scribed; and any national banking association having at any 
time bonds of the United States deposited with the Treasurer 
in excess of the amount required by law to be at such time 



APPENDIX 305 

deposited, may withdraw the whole or any part of such excess. 
But nothing herein contained shall be construed to authorize 
or permit the withdrawal of bonds required to be deposited 
under the provision of Section 5153 of the Revised Statutes 
of the United States, as security for the safe keeping and prompt 
payment of public moneys deposited with any national bank- 
ing association. 

Sect. 20. That every national banking association shall at 
all times keep and have on deposit with the Division of Issue 
and Redemption for the purpose hereinafter specified a sum 
in gold coin equal to 5 per centum of its outstanding circula- 
tion. The amounts so kept on deposit shall constitute a fund 
to be known as "The Bank Note Guaranty Fund," which 
fund shall be held for the following purpose, and for no other, 
namely : — 

Whenever the Comptroller of the Currency shall have be- 
come satisfied .... that any association has refused to pay 
its circulating notes on demand in lawful money, he shall 
direct the redemption of such notes from the Bank Note 
Guaranty Fund aforesaid, and such notes shall thereupon be so 
redeemed. After the failure of any national banking asso- 
ciation to redeem its notes shall have been thus ascertained, 
the bonds deposited with the Treasurer of the United States 
shall be sold, as provided by law, and the proceeds of such 
sale shall be paid into the Bank Note Guaranty Fund. The 
Comptroller of the Currency shall forthwith collect, for the 
benefit of said fund from the assets of the bank and from the 
stockholders thereof, according to their liability, as declared 
by this Act, such sum as, with the bank's balance in the Bank 
Note Guranty Fund, shall equal the amount of its circulating 
notes outstanding. And for this purpose the United States 
shall, on behalf of the Bank Note Guaranty Fund, have a para- 
mount lien upon all the assets of the association ; and such fund 
shall be made good out of such assets in preference to any 
and all other claims whatsoever, except the necessary costs 
and expenses of administering the same. 

Sect. 21. That whenever the Comptroller of the Currency 



306 APPENDIX 

shall ascertain what deficiency, if any, exists between the 
aggregate collections for the benefit of the Bank Note Guaranty 
Fund in the case of any failed bank and the amount of its out- 
standing notes redeemed and to be redeemed from the said 
fund, he shall assess such deficiency upon all the national 
banks in proportion to their notes outstanding at the time of 
the failure of such bank. 

Sect. 25. That every national banking association shall 
pay, on or before the last day of every month, to the Division 
of Issue and Redemption, a duty imposed at the rate of 2 per 
centum per annum upon the average daily amount of its 
circulating notes outstanding in excess of 60 per centum of its 
capital stock, and not in excess of 80 per centum of such capi- 
tal stock, and a duty imposed at the rate of 6 per centum per 
annum upon the average daily amount of such notes out- 
standing in excess of 80 per centum of its capital stock. 

Sect. 30. That no national banking association shall count 
or report any of its own notes as a part of its cash or cash 
assets. 

McCLEARY BILL 

May 11, 1898 
Be it enacted, etc. : . . . . 

That there is hereby created a division in the Treasury De- 
partment to be known as the Division of Issue and Redemp- 
tion. 

There is hereby created a board consisting of three members, 
to be known as the Comptrollers of the Currency. The said 
board shall have the management of the Division of Issue and 
Redemption, and shall take the place of the Comptroller of 
the Currency 

Sect. 2. That to the Division of Issue and Redemption 
shall be committed all functions of the Treasury Department 
pertaining to the issue and redemption of notes and certifi- 
cates, and to the exchange of coins; and in the said Division 
of Issue and Redemption shall be held the guaranty fund and 



APPENDIX 307 

the redemption fund of the national banking associations, and 
through it shall be conducted the operations of redeeming the 
circulating notes of national banking associations, as pre- 
scribed by law 

Sect. 3. That a reserve shall be established in the Division 
of Issue and Redemption aforesaid by the transfer to it by the 
Treasurer of the United States from the general funds of the 
Treasurer of an amount of gold, in coin and bullion, equal to 
25 per cent of the amount, both of United States notes and 
Treasury notes issued under the Act of July 14, 1890, outstand- 
ing, and a further sum in gold equal to 5 per cent of the aggre- 
gate amount of the coinage of silver dollars 

Sect. 4. That it shall be the duty of the Secretary of the 
Treasury to maintain the gold reserve in the Division of Issue 
and Redemption aforesaid at such sum as shall secure the 
certain and immediate redemption of all notes and exchange 
of all silver dollars presented, as hereinafter provided for; 
and for this purpose he may, from time to time, transfer to the 
Division of Issue and Redemption any funds in the Treasury 
not otherwise appropriated, in excess of an actual cash balance 
of $50,000,000; and in addition thereto he is authorized to 
issue and sell, for gold, whenever it is in his judgment necessary 
to the ends aforesaid, and for no other purpose, certificates of 
indebtedness of the United States bearing interest at a rate not 
exceeding 3 per cent per annum, payable in gold coin at the 
end of five years, but redeemable in gold coin at the option of 
the United States after one year, and the proceeds of all such 
sales shall be paid into the Division of Issue and Redemption 
for the purpose aforesaid. 

Sect. 12. That the circulating notes provided for in this 
Act shall consist of three classes, namely, national reserve notes, 
national bank notes and national currency notes. 

The words "national reserve notes," when used in this Act, 
shall be understood to mean notes issued to a national bank- 
ing association in exchange for United States notes, and for 
whose current redemption in gold coin the banking association 
receiving the same shall be made immediately liable, and whose 



308 APPENDIX 

ultimate payment shall be made by the Government of the 
United States. 

That the words " national bank notes," when used in this 
Act, shall mean circulating notes issued by national banking 
associations, and secured by deposits of United States bonds. 

That the words " national currency notes," when used in 
this Act, shall be understood to mean circulating notes issued 
by a national banking association, and constituting a direct 
and ultimate liability of the said banking association as pro- 
vided in this Act. 

Sect. 13. That any national banking association, on com- 
plying with the provisions of this Act, shall, if its capital be 
wholly paid up and unimpaired, be entitled to receive from the 
Comptrollers of the Currency national bank notes or national 
currency notes, or both, of the different denominations here- 
inafter specified (none, however, being less than $10) in blank, 
registered and countersigned as provided by law, to the amounts 
and in the manner following, and on the following terms and 
conditions, but in no case exceeding in the sum of their bank 
notes and currency notes * the amount of such paid-up and un- 
impaired capital. 

Subdivision A. That any national banking association may 
deposit with the Treasurer of the United States under such 
regulations as the Secretary of the Treasury may approve, 
United State notes to an amount not exceeding its paid-up and 
unimpaired capital, and shall then be entitled to receive in 
exchange therefor from the Comptrollers of the Currency an 
equal amount of National Reserve notes, of the kind and de- 
nominations described in Sections 1 2 and 1 5 of this Act. 

United States notes received into the Division of Issue and 
Redemption in exchange for national reserve notes shall be 
cancelled as received. 

Subdivision B. That upon the deposit by any national 
banking association of United States bonds, .... it shall 
be entitled to receive from the Comptrollers of the Currency 

*The insertion of the words in italics is recommended in the report. 



APPENDIX 309 

national bank notes of different denominations in blank, as 
provided by this Act, equal in amount to the par value of the 
bonds so deposited 

Subdivision C. That any national banking association, 
having deposited with the Treasurer of the United States, 
United States notes and received in exchange therefor national 
reserve notes, shall be entitled to receive and issue, in addition 
thereto, an amount of national currency notes equal to the 
amount of national reserve notes received as aforesaid: Pro- 
vided, however, that the amount of national currency notes thus 
issued shall not exceed the amount of its national bank notes 
outstanding; And provided further, That the notes thus issued 
shall not exceed 40 per cent of the paid-up and unimpaired 
capital of the bank, but an additional amount of the national 
currency notes may be issued. 

Sect. 23. That every national banking association shall 
at all times keep and have on deposit with the Division of 
Issue and Redemption for the purpose hereinafter specified, 
a sum in gold coin equal to 5 per cent of the outstanding cir- 
culation of national currency notes. The amount so kept on 
deposit shall constitute a fund to be known as the " guaranty 
fund," which fund shall be held for the following purpose, and 
for no other, namely: 

Whenever the Comptrollers of the Currency shall have be- 
come satisfied that any association has refused to pay any of 
its circulating notes on demand, they shall direct the redemp- 
tion of its national currency notes from the guaranty fund 
aforesaid, and the redemption in gold coin of the United States 
from the reserve fund in the Division of Issue and Redemption 
of the national reserve notes issued to it. After the failure of 
any national banking association to redeem any of said notes 
shall have been thus ascertained the bonds deposited by it with 
the Treasurer of the United States shall be sold as provided 
by law, and the proceeds of such sale shall be applied first to 
the redemption of the notes for which they are held and the 
balance, if any, shall be paid into the guaranty fund, so far as 



310 APPENDIX 

may be necessary to provide for the final redemption of any 
other outstanding notes of such bank. 

The Comptrollers of the Currency shall forthwith collect, 
for the benefit of said guaranty fund, from the assets of the 
bank and from the stockholders thereof, according to their 
liability as declared by this act, such sum as, with the bank 
balance in the guaranty fund as aforesaid, shall equal the 
amount of its national currency notes outstanding. And for 
this purpose the United States shall, on behalf of the guaranty 
fund, have a paramount lien upon all the assets of the asso- 
ciation; and such fund shall be made good out of such assets 
in preference to any and all other claims whatsoever, except 
the necessary cost and expenses of administering the same. 

Sect. 27. That the fund of 5 per cent of outstanding national 
bank notes required to be kept on deposit by every national 
banking association for the current redemption of the circu- 
lating notes of such association shall be required to be equal 
to 5 per cent of the national reserve notes issued to it and of 
its national bank notes outstanding, and shall be in gold coin 
of the United States ; and the Comptroller of the Currency shall 
have authority to provide for the redemption of said national 
bank notes and national reserve notes at any or all of the sub- 
treasuries of the United States. Said note shall be paid in 
gold coin of the United States, and shall thereupon be returned 
to the banks to which they were originally issued. 

Sect. 30. That when the amount of the National Currency 
notes of any national banking association issued under this 
Act shall, together with its national banking notes outstanding, 
exceed 80 per cent of its capital, every such national banking 
association shall pay, on or before the last day of every month, 
to the Division of Issue and Redemption a tax imposed at the 
rate of one-half of 1 per cent per month upon the average daily 
amount of said National Currency notes in circulation in excess 
of 80 per cent of its capital stock, and which shall not have 
been returned to the comptrollers for cancellation or covered 
by an equal amount of gold coin deposited with the first comp- 
troller for the retirement of such notes. 



APPENDIX 311 

Sect. 35. That it shall be lawful for any national banking 
association to establish branches under such rules and regu- 
lations as may be prescribed by the Comptrollers of the Cur- 
rency. 

ALDRICH BILL 

December 19, 1899 
Be it enacted, etc. : 

That the dollar consisting of twenty-five and eight-tenths 
grains gold, nine-tenths fine, shall, as established by Section 
3 51 1 of the Revised Statutes of the United States, continue 
to be the standard unit of value, and all forms of money issued 
or coined by the United States shall be maintained at a parity 
of value with this standard; and United States notes, and 
Treasury notes issued under the Act of July 14, 1890, when 
presented to the Treasury for redemption shall be redeemed 
in gold coin of such standard. 

Sect. 2. That it shall be the duty of the Secretary of the 
Treasury, in order to secure the prompt and certain redemp- 
tion of United States and Treasury notes as hereinbefore pro- 
vided, to set apart in the Treasury a reserve fund of $150,000,- 
000 in gold coin, which fund shall be used for such redemption 
purposes only, and whenever and as often as any of said notes 
shall be redeemed from said fund it shall be the duty of the 
Secretary of the Treasury to use said notes so redeemed to 
restore and maintain such reserve fund, in the manner follow- 
ing, to wit: First, by exchanging the notes so redeemed for 
any gold coin in the general fund of the Treasury; second, by 
accepting deposits of gold coin at the Treasury or at any sub- 
treasury in exchange for the United States notes so redeemed ; 
third, by procuring gold coin by the use of said notes, in ac- 
cordance with the provisions of section thirty-seven hundred 
of the Revised Statutes of the United States. If the Secretary 
of the Treasury is unable to restore and maintain the gold 
coin in the reserve fund by the foregoing methods, and the 
amount of such gold coin in said fund shall at any time fall 



312 APPENDIX 

below $100,000,000, then it shall be his duty to restore and 
maintain the same by borrowing money on the credit of the 
United States. 

Sect. 7. That upon deposit with the Treasurer of the 
United States, by any national banking association, of any 
bonds of the United States in the manner provided by exist- 
ing law, such association shall be entitled to receive from the 
Comptroller of the Currency circulating notes in blank, 
registered and countersigned as provided by law, equal in 
amount to the par value of the bonds so deposited; and any 
national banking association now having bonds on deposit 
for the security of circulating notes, and upon which an amount 
of circulating notes has been issued less than the par value of 
the bonds, shall be entitled, upon due application to the 
Comptroller of the Currency, to receive additional circulating 
notes in blank to an amount which will increase the circulating 
notes held by such association to the par value of the bonds 
deposited, such additional notes to be held and treated in the 
same way as circulating notes of national banking associa- 
tions heretofore issued, and subject to all the provisions of 
existing law affecting such notes 



SECRETARY GAGE'S BILL 

Be it enacted, etc.: 

That there be established in the Treasury Department, 
as a part of the office of the Treasurer of the United States, a 
division to be designated and known as the Division of Issue 
and Redemption, to which shall be assigned, under such 
regulations as the Secretary of the Treasury may approve, all 
records and accounts relating to the issue, redemption and 
exchange as hereinafter provided of the several classes of 
United States paper money. 

There shall be transferred from the general fund in the 
Treasury of the United States and taken up on the books of 
said division as a redemption fund the sum of $125,000,000, in 



APPENDIX 313 

United States gold coin and bullion, and such further sums 
of standard silver dollars and silver bullion, purchased under 
the Act of Congress approved July 14, 1890, as shall equal 
the silver certificates outside the Treasury and Treasury notes 
of 1890 outstanding on the date when this Act shall take effect; 
and thereafter the gold and silver coins and bullion hereby 
transferred from the general fund in the Treasury as herein 
provided shall be increased or diminished, as the case may be, in 
accordance with the provisions of this Act, and in no other way. 

Sect. 2. That all United States notes, Treasury notes of 
1890 and silver certificates presented for redemption shall be 
redeemed from the redemption fund herein provided, in ac- 
cordance with the terms of existing law; but the notes and 
certificates so redeemed shall be held in and constitute a part 
of said fund, and shall not be withdrawn from said fund nor 
disbursed, except in exchange for an equivalent amount of the 
coin in which said notes or certificates were redeemed; but to 
enable the Secretary of the Treasury more thoroughly to 
carry out the provisions contained in this act, he is hereby 
authorized to exchange any of the funds in the Division of 
Issue and Redemption for any other funds which may be in 
the general fund of the Treasury Department. 

Sect. 5. That any national banking association whose 
deposit of bonds is less than the amount of its capital may 
deposit with the Treasurer of the United States, under such 
regulations as the Secretary of the Treasury may approve, 
United States notes, Treasury notes of 1890, and silver certifi- 
cates, and shall be entitled to receive from the Comptroller 
of the Currency and to issue an equal amount of its circulating 
notes; but the aggregate amount of bonds, United States notes, 
Treasury notes of 1890 and silver certificates deposited by any 
national banking association shall not exceed the amount of its 
capital : 

Provided, That the total amount of United States notes, 
Treasury notes of 1890 and silver certificates deposited with 
the Treasurer of the United States under authority of this 
section shall not exceed the sum of $200,000,000. 



314 APPENDIX 

Sect. 6. That the Secretary of the Treasury shall issue, 
from time to time, in his discretion, bonds of the same character 
and class as those described in the third section of this act, 
and shall substitute the same with the Treasurer of the United 
States for equal amounts of the United States notes, Treasury 
notes of 1890 and silver certificates deposited by national 
banking associations, and the bonds so issued and substituted 
shall be charged to the respective national banking associations, 
and be accounted for by them at such prices, not less than par, 
as shall represent the market value of such bonds; and the 
United States notes, Treasury notes of 1890 and silver cer- 
tificates released as herein provided shall become a part of 
the general redemption fund ; and the Secretary of the Treasury 
is hereby authorized to exchange any of said Treasury notes 
of 1890 and said silver certificates for a like amount of United 
States notes; 

Provided, That the amount of bonds issued under the author- 
ity of this section shall not exceed the sum of $200,000,000. 

Sect. 7. When any national bank now existing or here- 
after organized shall have deposited such United States bonds, 
United States notes, Treasury notes of 1890 or silver certifi- 
cates, to an amount of not less than 50 per centum of its capital, 
it shall be entitled to receive from the Comptroller of the Cur- 
rency, and to issue, national bank notes, in addition to the 
50 per centum thus provided, to the amount of 25 per centum 
of such deposits; but the circulation issued by any national 
banking association shall never be in excess of its paid-up 
capital stock, and the additional notes so issued shall not be 
secured by said deposit, but shall constitute a first lien upon 
all the remaining assets of the association issuing such notes. 
Upon the failure of any association to redeem its circulating 
notes above provided, whether the same are issued against 
deposited security or against general assets, the same shall be 
promptly redeemed by the Treasurer of the United States. 
To secure the United States against any loss arising from its 
guarantee to pay and redeem such additional circulating notes, 
it shall be the duty of the Comptroller of the Currency to levy 



APPENDIX 315 

upon and collect from every national banking association 
issuing such unsecured circulation a tax at the rate of 2 per 
centum per annum on such unsecured circulation; which said 
tax of 2 per centum per annum shall be paid to the Treasurer 
of the United States in equal semi-annual payments in January 
and July of each year, and when so collected it shall constitute 
a safety fund out of which the United States shall be reimbursed 
for any redemption of said unsecured circulation it may make 
as herein provided. The safety fund thus created shall be 
invested by the Secretary of the Treasury in such Govern- 
ment bonds as he may consider advisable. Said tax of 2 per 
centum per annum shall be in addition to the tax of one-half 
of 1 per centum per annum on circulating notes hereinafter 
authorized. 

Sect. 8. That each national banking association shall 
deposit and maintain in the Treasury of the United States a 
sum of lawful money equal to 10 per centum of its aggregate 
circulation, said sum to be in lieu of the 5 per centum redemp- 
tion fund now required by Sect. 3 of the Act approved June 
20, 1874, to be maintained, and to be subject to all the pro- 
visions of existing law respecting said redemption fund not 
inconsistent with the provisions of this Act; and, in considera- 
tion of the deposits of bonds, United States notes, Treasury 
notes of 1890 and silver certificates, and the tax of 2 per cen- 
tum on the unsecured circulating notes of national banking 
associations, and of the deposit of lawful money provided in 
this section, the faith of the United States is hereby pledged to 
the redemption in lawful money of the United States of all 
the circulating notes of said national banking associations. 



316 APPENDIX 

GOLD STANDARD ACT 

March 14, 1900 

an act to define and fix the standard of value, to 
maintain the parity of all forms of money issued 
or coined by the united states, to refund the 
public debt, and for other purposes. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress Assembled: 

That the dollar consisting of twenty-five and eight-tenths 
grains of gold, nine-tenths fine, as established by Section 351 1 
of the Revised Statutes of the United States, shall be the 
standard unit of value, and all forms of money issued or coined 
by the United States shall be maintained at a parity of value 
with the standard, and it shall be the duty of the Secretary of 
the Treasury to maintain such parity. 

Sect. 2. That United States notes, and Treasury notes 
issued under the Act of July 14, 1890, when presented to the 
Treasury for redemption, shall be redeemed in gold coin of 
the standard fixed in the first section of this Act, and in order 
to secure the prompt and certain redemption of such notes as 
herein provided it shall be the duty of the Secretary of the 
Treasury to set apart in the Treasury a reserve fund of $150,- 
000,000 in gold coin and bullion, which fund shall be used for 
such redemption purposes only, and whenever and as often as 
any of said notes shall be redeemed from said fund it shall be 
the duty of the Secretary of the Treasury to use said notes so 
redeemed to restore and maintain such reserve fund in the 
manner following, to wit: First, by exchanging the notes so 
redeemed for any gold coin in the general fund of the Treasury ; 
second, by accepting deposits of gold coin at the Treasury or 
at any sub-treasury in exchange for the United States notes so 
redeemed; third, by procuring gold coin by the use of said 
notes, in accordance with the provisions of Sect. 3700 of the 
Revised Statutes of the United States. If the Secretary is un- 



APPENDIX 317 

able to restore and maintain the gold coin in the reserve fund 
by the foregoing methods, and the amount of such gold coin 
and bullion in said fund shall at any time fall below $100,000,- 
000, then it shall be his duty to restore the same to the maximum 
sum of $150,000,000 by borrowing money on the credit of the 
United States .... and the gold coin received from the sale 
of said bonds shall first be covered into the general fund of the 
Treasury and then exchanged, in the manner hereinbefore 
provided, for an equal amount of the notes redeemed and held 
for exchange, and the Secretary of the Treasury may, in his 
discretion, use said notes in exchange for gold, or to purchase 
or redeem any bonds of the United States, or for any other 
lawful purpose the public interests may require, except that 
they shall not be used to meet deficiencies in the current 
revenues. That United States notes when redeemed, in ac- 
cordance with the provisions of this section, shall be reissued, 
but shall be held in the reserve fund until exchanged for gold 
as herein provided ; and the gold coin and bullion in the reserve 
fund, together with the redeemed notes held for use as pro- 
vided in this section, shall at no time exceed the maximum sum 
of $150,000,000. 

Sect. 4. That there be established in the Treasury Depart- 
ment, as a part of the office of the Treasurer of the United 
States, divisions to be designated and known as the Division 
of Issue and the Division of Redemption, to which shall be 
assigned respectively, under such regulations as the Secretary 
of the Treasury may approve, all records and accounts re- 
lating to the issue and redemption of the United States notes, 
gold certificates, silver certificates, and currency certificates. 
There shall be transferred from the accounts of the general 
fund of the Treasury of the United States, and taken up on 
the books of said divisions respectively, accounts relating to 
the reserve fund for the redemption of the United States notes 
and Treasury notes, the gold coin held against outstanding gold 
certificates, the United States notes held against outstanding 
currency certificates, and the silver dollars held against out- 
standing silver certificates, and each of the funds represented 



318 APPENDIX 

by these accounts shall be used for the redemption of the notes 
and certificates for which they are respectively pledged, and 
shall be used for no other purpose, the same being held as 
trust funds. 

Sect. io. That Sect. 5138 of the Revised Statutes is hereby 
amended so as to read as follows: 

"Sect. 5138. No association shall be organized with a 
less capital than $100,000 except that banks with a capital 
of not less than $50,000 may, with the approval of the 
Secretary of the Treasury, be organized in any place the 
population of which does not exceed 6,000 inhabitants, 
and except that banks with a capital of not less than 
$25,000 may, with the sanction of the Secretary of the 
Treasury, be organized in any place the population of 
which does not exceed 3,000 inhabitants. No associa- 
tion shall be organized in a city the population of which 
exceeds 50,000 persons with a capital of less than $200,000." 

Sect. ii. That the Secretary of the Treasury is hereby 
authorized to receive at the Treasury any of the outstanding 
bonds of the United States .... and to issue in exchange 
therefor an equal amount of coupon or registered bonds of 
the United States in such form as he may prescribe, in de- 
nominations of $50 or any multiple thereof, bearing interest 
at the rate of 2 per cent per annum, payable quarterly 

Sect. 12. That upon the deposit with the Treasurer of the 
United States by any national banking association, of any 
bonds of the United States in the manner provided by existing 
law, such association shall be entitled to receive from the 
Comptroller of the Currency circulating notes in blank, 
registered and countersigned as provided by law, equal in 
amount to the par value of bonds so deposited; .... pro- 
vided, That the total amount of such notes issued to any such 
association may equal at any time but shall not exceed the 
amount at such time of its capital stock actually paid in 



APPENDIX 319 

FOWLER BILL 

April 4, 1902 

Be it enacted ', etc.: . . . . 

That there shall be, and is hereby, created and established 
in the Treasury Department a Division of Banking and Cur- 
rency, which shall be in charge of a board consisting of three 
members 

Sect. 2. That if any national bank shall assume the cur- 
rent redemption, as hereinafter described, of an amount of 
United States notes equal to 20 per centum of its paid-up 
capital, it shall have the right, without depositing United States 
bonds as now provided by law — 

First — To immediately take out for issue and circulate an 
amount of bank notes equal to 10 per centum of its paid-up 
capital, by paying a tax, on the first days of January and July 
of each year, of one-eighth of 1 per centum upon the average 
amount of such notes in actual circulation during the pre- 
ceding six months. 

Second — To take out for issue and circulate an amount of 
bank notes equal to 10 per centum of its paid up-capital at any 
time after the expiration of one year from the date of the 
assumption aforesaid; and it shall pay into the Treasury of 
the United States, on the first days of January and July of each 
year, a tax of one-eighth of 1 per centum upon the average 
amount of such notes in actual circulation during the preceding 
six months 

Third — To take out for issue and circulate an amount of 
bank notes equal to 10 per centum of its paid-up capital at 
any time after the expiration of two years from the date of the 
assumption aforesaid ; and it shall pay into the Treasury of the 
United States, on the first days of January and July of each 
year, a tax of five-eighths of 1 per centum upon the average 
amount of such notes in actual circulation during the pre- 
ceding six months. 

Fourth — To take out for issue and circulate an amount of 



320 APPENDIX 

bank notes equal to 10 per centum of its paid-up capital at any 
time after the expiration of three years from the date of the 
assumption aforesaid; and it shall pay into the Treasury of the 
United States, on the first days of January and July of each 
year, a tax of five-eighths of i per centum upon the average 
amount of such notes in actual circulation during the pre- 
ceding six months. 

Fifth — To take out for issue and circulate an amount of 
bank notes equal to 10 per centum of its paid-up capital at any 
time after the expiration of four years from the date of the 
assumption aforesaid ; and it shall pay into the Treasury of the 
United States, on the first days of January and July of each 
year, a tax of five-eighths of i per centum upon the average 
amount of such notes in actual circulation during the pre- 
ceding six months. 

Sixth — To take out for issue and circulate an amount of 
bank notes equal to 10 per centum of its paid-up capital at 
any time after the expiration of five years from the date of the 
assumption aforesaid; and it shall pay into the Treasury of the 
United States, on the first days of January and July of each 
year, a tax of five-eighths of i per centum upon the average 
amount of such notes in actual circulation during the preceding 
six months. 

Seventh — With the approval of the Board of Control, to 
take out for issue and circulate an amount of notes equal to 
20 per centum of its paid-up capital at any time after the 
expiration of six years from the date of the assumption afore- 
said; but it shall pay into the Treasury of the United States, 
on the first days of January and July of each year, a tax of one 
and one-half per centum upon the average amount of such 
notes in actual circulation during the preceding six months. 

Eighth — With the approval of the Board of Control, to take 
out for issue and circulate an amount of notes equal to 20 per 
centum of its paid-up capital at any time after the expiration 
of seven years from the date of the assumption aforesaid; but 
it shall pay into the Treasury of the United States, on the first 
days of January and July of each year, a tax of two and one- 



APPENDIX 321 

half per centum upon the average amount of such notes in 
actual circulation during the preceding six months. 

The manner and form of the assumption of the current re- 
demption of the United States notes, as aforesaid, shall be as 
follows: Each note shall bear the endorsement: 

"For value received, the national bank of (city), 

(State), will currently redeem this note in gold coin until the 
same has been paid and canceled in accordance with the pro- 
visions of law." .... 

Whenever a national bank shall present any United States 
notes at the United States Treasury for indorsement, as afore- 
said, it shall at the same time surrender to the United States 
Treasury an additional amount of United States notes equal 
to one-half of the United States notes presented for such in- 
dorsement and receive in exchange therefor gold coin; and the 
United States notes so redeemed shall not be reissued, but shall 
be canceled and destroyed. 

Sect. 3. That when the national banks of the United States 
shall have assumed the current redemption of United States 
notes amounting in the aggregate to $130,000,000, and the 
United States has redeemed and canceled United States notes 
amounting to $65,000,000, no national bank shall thereafter 
pay out any United States notes the current redemption of 
which has not been assumed by some national bank, but shall 
return the same to the United States Treasury for redemption, 
and the Secretary of the Treasury shall redeem the United 
States notes so returned out of the gold coin in the issue and 
redemption of the Treasury, and they shall not be reissued, 
but shall be canceled and destroyed. But it shall be the duty 
of the Secretary of the Treasury to maintain the reserve fund 
at an amount not less than thirty-three and one-third per cen- 
tum of the United States notes at any time outstanding. 

From and after the first presentation for redemption and 
cancellation of any United States notes in accordance with the 
provisions of this section, the Secretary of the Treasury shall 
not pay out or issue any gold certificates. 

Sect. 4. That after the national banks shall have assumed 



322 APPENDIX 

the current redemption of $120,000,000 of United States notes, 
and the United States shall have redeemed, canceled, and 
destroyed $65,000,000 of United States notes, in accordance 
with Section 2 of this Act, any national bank which has not 
assumed the current redemption of any United States notes as 
hereinbefore provided may then take out an amount of cir- 
culation equal to 10 per centum of its capital, and from year 
to year thereafter additional amounts of circulation in accord- 
ance with the provisions of Section 2 of this Act; but upon 
the first 20 per centum of the total circulation to which it is 
entitled under this Act it shall pay into the Treasury of the 
United States, on the first days of January and July of each 
year, five-eighths of 1 per centum upon the average amount 
of such notes in actual circulation during the preceding six 
months, and upon all such notes taken out for issue in excess 
of said 20 per centum the taxes prescribed in Section 2 of 
this Act 

Sect. 6. That all the bank notes taken out for issue in 
accordance with the provisions of this Act shall be furnished 
by the United States at the expense of the respective banks 
issuing them, and shall be in denominations of ten dollars and 
multiples thereof. 

Sect. 7. That such notes shall be a first lien upon the assets 
of the respective banks issuing them, and shall be received upon 
deposit and for all purposes of debt or liability by every national 
bank at par and without any charge of whatsoever kind, and 
such notes shall be receivable for all public dues except 
duties on imports, and when so received may be paid out again. 

Sect. 8. That the total amount of circulating notes of all 
kinds of any national bank may equal, but shall not at any 
time exceed, the amount of its paid-up capital 

Sect. 10. That the Secretary of the Treasury is hereby 
authorized, in his discretion, to deposit all the money of the 
United States in excess of $50,000,000, except that in the Issue 
and Redemption Division of the Treasury, in national banks, 
upon the condition that said banks shall first deposit in 
the United States Treasury United States bonds equal in 



APPENDIX 323 

amount at par to the sum to be so deposited; and such banks 
shall, on the first days of January and July of each year, pay 
interest thereon to the United States at the rate of i per centum 
per annum upon the average balances of the preceding six 
months, but such banks shall not be required to hold any 

reserve against such deposits 

" Any national banking association may amend its articles of 
association with reference to the places where its banking 
operations are to be carried on upon the unanimous vote of its 
board of directors by and with the approval of the Board of 
Control of Banking and Currency: Provided, however, That 
authority to establish branches in the possessions of the United 
States and in foreign countries shall be given only to banks 
having a paid-up capital of not less than $5,000,000." 

PAYNE BILL 

February 26, 1903 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

"Sect. 5153. All national banking associations, designated 
for that purpose by the Secretary of the Treasury, shall be 
depositories of public money, under such regulations as may 
be prescribed by the Secretary, and they may also be em- 
ployed as financial agents of the Government; and they shall 
perform all such reasonable duties as depositories of public 
moneys and financial agents of the Government as may be 
required of them. The Secretary of the Treasury may de- 
posit in such designated depositories public money received 
from all sources, and shall require such depositories to give 
satisfactory security, as hereinafter authorized, for the safe- 
keeping and prompt payment of the public money so de- 
posited with them and for the faithful performance of their 
duties as financial agents of the Government. The Secretary 
of the Treasury may accept as security for the safe-keeping 
of public money deposited with national banking associations, 



324 APPENDIX 

as herein authorized, the deposit of bonds of the United States, 
bonds or other interest-bearing obligations of any State of 
the United States, or any legally authorized bonds issued for 
municipal purposes by any city in the United States which has 
been in existence as a city for a period of twenty-five years, and 
which for a period of ten years previous to such deposit has 
not defaulted in the payment of any part of either principal 
or interest of any debt authorized to be contracted by it, and 
which has at such date more than fifty thousand inhabitants as 
established by the last national census, and whose net indebted- 
ness does not exceed 10 per centum of the valuation of the 
taxable property therein, to be ascertained by the last pre- 
ceding valuation of property for the assessment of taxes; or 
the first-mortgage bonds, not including street railway bonds, 
of any railroad company which has paid dividends of not less 
than 4 per centum per annum regularly and continuously 
on its entire capital stock for a period of not less than ten years 
previous to the deposit of the bonds. The Secretary of the 
Treasury may accept the securities herein enumerated in such 
proportions as he may from time to time determine, and he 
may at any time require the deposit of additional securities, 
or require any depository to change the character of the securi- 
ties already on deposit. National banking associations having 
on deposit public money shall pay to the United States for the 
use thereof interest at the rate of not less than one and one- 
half per centum per annum, such rate to be fixed from time 
to time by the Secretary of the Treasury ; and all public moneys 
in any depository shall be payable on demand upon the draft 
of the Treasurer of the United States. The United States 
shall have a lien on the current assets of banks in which public 
moneys are deposited for the repayment of the same on de- 
mand of the Treasurer of the United States as aforesaid; but 
the securities deposited with the Secretary of the Treasury for 
the safe-keeping of such moneys shall be sold before the said 
Hen is enforced and the proceeds applied to the discharge of 
said lien to the extent of the proceeds of sale : Provided, That 
no reserve shall be required on account of such deposits." 



APPENDIX 325 

FOWLER BILL 

February 26, 1903 
Be it enacted, etc. : . . . . 

That any national bank may, with the approval of the 
Comptroller of the Currency, take out for issue and circulation 
an amount of national-bank notes not exceeding 25 per centum 
of its paid-up and unimpaired capital without depositing 
United States bonds with the United States Treasury in the 
manner provided by existing law. 

Sect. 2. That said national-bank notes shall be furnished 
by the United States at the expense of the respective banks 
issuing them, and shall be in the denominations of ten dollars 
and multiples thereof. 

Sect. 3. That before any national bank shall receive any 
of the bank notes referred to in this Act it shall first deposit 
in the Treasury of the United States as a guaranty of the pay- 
ment thereof an amount of United States bonds or gold coin, 
or United States notes, or in all equal to 5 per centum of the 
amount of the notes so taken out 

Sect. 4. That every national bank taking out such notes 
for issue and circulation shall, on the first days of January and 
July of each year, pay into the Treasury of the United States, 
in gold coin, a tax of one-quarter of 1 per centum upon the 
average amount of such notes in actual circulation during the 
preceding six months, and the tax so paid into the Treasury 
shall, with the 5 per centum deposited as a guaranty for the 
payment of the notes, constitute a guaranty fund. 

Sect. 5. That such notes shall be a paramount lien upon 
the assets of the respective banks issuing them 

Sect. 6. That any national bank having notes outstand- 
ing in excess of 75 per centum of its paid-up capital, to secure 
the payment of which United States bonds have been deposited, 
may, upon the deposit of lawful money for the redemption of 
such excess, take out for circulation the notes provided for in 
this Act, without reference to the limitation of $3,000,000 each 



326 APPENDIX 

month prescribed in Section 9 of the Act approved July 
twelfth, eighteen hundred and eighty-two. 

Sect. 7. That the provisions of the law contained in Section 
9 of the Act approved July twelfth, eighteen hundred and 
eighty-two, limiting the amount of notes that may be retired 
to $3,000,000 in any calendar month, shall not apply to the 
notes taken out in accordance with the provisions of this Act. 

Sect. 8. That every national bank taking out such notes 
for issue shall maintain at all times the same reserve against 
such notes when in actual circulation as is now prescribed by 
law for deposits 

Sect. 12. That upon the failure of a national bank any 
national-bank notes that have been taken out by it in accord- 
ance with the provisions of this Act shall, upon presentation 
to the United States Treasury, be paid in gold coin out of the 
guaranty fund; but the United States Treasury shall recover 
from the assets of the failed bank an amount equal to its out- 
standing notes, and the same shall be paid into the guaranty 
fund 

Sect. 15. That in addition to the provisions of Section 5153 
of the Revised Statutes, concerning the designation of public 
depositaries and the deposit of public moneys therein, the 
Secretary of the Treasury may also deposit in such designated 
depositaries any public money received from whatever source, 
including receipts from customs, without requiring security 
by the deposit of United States bonds and otherwise, as pro- 
vided in said section, but no such deposit shall in any case 
exceed 75 per centum of the paid-up and unimpaired capital 
of any such depositary. National banking associations hav- 
ing on deposit public money in accordance with the provisions 
of this Act shall pay to the United States for the use thereof 
interest at the rate of two per centum per annum, payable 
semi-annually on the first days of January and July of each 
year. The United States shall have a paramount lien on the 
assets of banks in which public moneys are deposited in ac- 
cordance with the provisions of this Act for the repayment of the 
same on demand of the Treasurer of the United States. . . , 



APPENDIX 327 

S. 3027 
IN THE SENATE OF THE UNITED STATES 

January 7, 1908 

Mr. Culberson introduced the following bill; which was 
read twice and referred to the Committee on Finance. 

A BILL TO REQUIRE NATIONAL BANKS TO HAVE AND KEEP 
ON HAND IN THEIR VAULTS THE RESERVE REQUIRED BY 
LAW, AND FOR OTHER PURPOSES. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That from and after the passage of this Act every national 
bank shall have and keep on hand in its vaults the reserve of 
lawful money provided for by law. All laws and parts of 
laws which authorize national banks to have and keep part 
of their reserve with other national banks, and all laws and 
parts of laws otherwise in conflict herewith, are hereby re- 
pealed. 

S. 3044 

IN THE SENATE OF THE UNITED STATES 

January 7, 1908 

Mr. Heyburn introduced the following bill; which was read 
twice and referred to the Committee on Finance. 

A BILL TO AMEND SECTIONS FIFTY-ONE HUNDRED AND 
NINETY-ONE AND FIFTY-ONE HUNDRED AND NINETY-TWO 
OF THE REVISED STATUTES OF THE UNITED STATES AND 
ALL ACTS AMENDATORY THEREOF, AND FOR OTHER PUR- 
POSES. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That from and after the first day of June, nineteen hundred 
and eight, every national banking association organized under 
the Act of June third, eighteen hundred and sixty-four, and 



328 APPENDIX 

any Act supplemental or amendatory thereof, shall at all times 
have on hand in lawful money of the United States an amount 
equal to at least twenty per centum of the aggregate amount 
of its deposits, and whenever the lawful money of any such 
association shall be below the amount of twenty per centum 
of its deposits such association shall not increase its liability 
by making any new loans otherwise than by discounting or 
purchasing bills of exchange payable at sight. Nor shall 
such banking association make or pay any dividend of its 
profits until the required proportion of the aggregate amount 
of its deposits and its lawful money of the United States so 
intended to be held in reserve shall have been fully restored, 
and the Comptroller of the Currency shall notify any such 
association whose lawful money reserves are below the amount 
above required to be kept on hand to make good such reserves, 
and if such association shall fail for thirty days thereafter to 
make good its reserves of lawful money the Comptroller of 
the Currency shall, with the concurrence of the Secretary of 
the Treasury, proceed to wind up the business of such asso- 
ciation, as provided in section fifty-two hundred and thirty- 
four of the Revised Statutes of the United States. 

No part of the lawful money reserves which such national 
banking association is hereby required to have on hand in 
lawful money of the United States shall consist of anything 
but lawful money of the United States actually in the posses- 
sion and custody of such national banking association. 

All Acts and parts of Acts inconsistent with any of the fore- 
going provisions of this Act are hereby repealed. 

All Acts and parts of Acts providing for the establishment 
or creation of central reserve banks, reserve banks, or addi- 
tional reserve banks are hereby repealed, and any such central 
reserve banks, reserve banks, or additional reserve banks as 
may have been heretofore created and be now existing shall, 
on or before the thirtieth day of June, nineteen hundred and 
eight, pay and return to the respective banks to which such 
moneys may belong all the moneys which such reserve banks 



APPENDIX 329 

may hold or have in their possession or under their control 
to the credit of any other national banking association as a 
part of the lawful reserves of such other national banking 
association. 

No national banking association shall, after the passage 
of this Act, deposit any part of its lawful money reserve herein 
provided to be maintained and kept with any other bank, 
or banking association, or elsewhere than in the vaults of 
the national banking association to which such reserve may 
belong. 

All Acts and parts of Acts in conflict with the provisions of 
this Act are hereby repealed. 

S. 2954 
IN THE SENATE OF THE UNITED STATES 

December 21, 1907 

Mr. Rayner (for Mr. Owen) introduced the following bill; 
which was read twice and referred to the Committee on 
Finance. 

A BILL PROVIDING SECURITY TO THE DEPOSITORS OF UNITED 
STATES NATIONAL BANKS; FOR THE PREVENTION OF THE 
HOARDING OF CURRENCY, AND FOR OTHER PURPOSES. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That from and after the passage of this Act the Comptroller 
of the Currency shall require the national banking associations 
of the United States to pay into the Treasury of the United 
States a tax upon their deposits, as fixed by the office of the 
Comptroller of the Currency, in a sum amply sufficient to 
provide a fund for the immediate payment of the depositors 
in full of any insolvent bank. Such fund shall be called the 
"liquidation fund," and from such fund, whenever a national 
bank is declared insolvent by the Comptroller of the Currency, 
the depositors of such bank shall be paid in full immediately 



330 APPENDIX 

from such "liquidation fund," and such liquidating bank be 
charged therewith. The net liquidated assets of such bank 
shall be deposited to the credit of the "liquidation fund" to 
the extent required to reimburse such fund the money advanced 
therefrom. 

Sect. 2. That the Secretary of the Treasury is hereby 
directed to prepare and keep on hand not less than one hun- 
dred million dollars of Treasury notes of the United States, 
to be kept in a special fund known as the "special circulation 
fund." Such notes may be advanced to any person or cor- 
poration upon proper security of bonds acceptable to the 
Secretary of the Treasury: Provided, That such advances 
shall not be in excess of ninety per centum of the market 
value of such bonds. Such advances made from the "special 
circulation fund" shall be charged for at a rate of six per 
centum per annum for the first four months and thereafter at 
the rate of eight per centum per annum, not exceeding a total 
period of one year. In the event of the depreciation of the 
market value of such bonds, further security shall be required 
to preserve the margin of the per centum under penalty of 
sale of such securities on the open market. The advances 
made from such fund shall be repaid within twelve months, 
and in default thereof, the bonds shall be sold, and after the 
repayment of the principal and interest of such advances and 
the cost of sale, the balance shall be returned to the owner of 
such bonds. The amount of the special circulation notes in 
the Treasury shall at no time be allowed to diminish to a point 
of exhaustion. The interest accruing on the loan of such 
special circulation notes shall go into the "liquidation fund" 
hereinabove provided. 



APPENDIX 331 

S. 3187 

IN THE SENATE OF THE UNITED STATES 

January 7, 1908 

Mr. Brown introduced the following bill; which was read 
twice and referred to the Committee on Finance. 

A BILL PROVIDING FOR THE CREATION OF A SPECIAL FUND 
WITH THE TREASURER OF THE UNITED STATES TO INSURE 
THE PAYMENT OF DEPOSITS IN NATIONAL BANKS THAT MAY 
HEREAFTER BECOME INSOLVENT. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That every national bank organized under the laws of the 
United States, or which shall hereafter be organized, shall, 
on or before the first day of January of each year after the 
passage of this Act, deposit with the Treasurer of the United 
States a sum equal to one-tenth of one per centum of its aver- 
age deposits for the six months preceding said first day of 
January, which sum shall be placed in a special fund to be 
maintained perpetually for the payment of depositors in na- 
tional banks hereafter declared to be insolvent by the Comp- 
troller of the Currency.. In case any national bank shall 
refuse or neglect to make such deposit, special notice shall be 
served upon its officers by said Treasurer of the United States, 
and neglect or refusal to comply with the provisions of this Act 
within thirty days after said special notice shall have been 
served, shall work a forfeiture of the charter of said bank, and 
the Comptroller of the Currency shall immediately take pos- 
session as provided by law in cases of mismanagement or in- 
solvency: Provided, That whenever the total amount paid 
into the Treasury by any bank shall be equal to or greater than 
two per centum of its average deposits for the preceding six 
months, said banks shall be exempt from making the deposit. 

Sect. 2. That said special fund created by this Act shall 



332 APPENDIX 

be invested by the Treasurer of the United States as he may 
deem expedient, in bonds of the United States or bonds of the 
several States, and said Treasurer is authorized to dispose of 
any portion of such bonds whenever he deems it necessary for 
the purpose of paying depositors in insolvent national banks 
as hereafter provided in this Act. 

Sect. 3. That whenever a national bank shall be declared 
insolvent and a receiver is appointed, said receiver shall, 
within thirty days, report to the Secretary of the Treasury a 
certified list of the amounts due bona fide depositors, and, upon 
receipt of this list, the Secretary of the Treasury shall imme- 
diately pay out of the special fund created by this Act to the 
receiver of said insolvent bank the total amount due said de- 
positors, as shown by said certified list, which sum shall be 
forthwith distributed by said receiver to said depositors: Pro- 
vided, That for the purposes of this Act no one shall be deemed 
a depositor who has received and accepted collateral security 
for his deposit. 

Sect. 4. That the receiver shall settle up the affairs of 
said insolvent bank, as provided by law, paying into the special 
fund provided for in this Act all the dvidends due depositors, 
said dividends to become a part of said special fund. 

S. 3028 

IN THE SENATE OF THE UNITED STATES 

January 7, 1908 

Mr. Culberson introduced the following bill; which was 
read twice and referred to the Committee on Finance. 

A BILL TO FURTHER PROTECT DEPOSITS IN NATIONAL BANKS, 
FOR OTHER PURPOSES. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 
That in every case where any national bank which accepts 
the provisions of this Act becomes insolvent, or is unable to 



APPENDIX 333 

pay its deposits, in whole or in part, all national banks which 
shall accept the provisions of this Act shall pay whatever 
may be due the depositors of such bank which it is unable 
immediately to pay, and the amount to be paid by each of 
said banks shall be in proportion to the combined capital and 
surplus of each, as shown by the statement of the condition 
of the banks made to the Comptroller of the Currency next 
preceding the insolvency or failure to pay deposits. By 
deposits, as herein used, is meant individual deposits subject 
to check and which bear no interest: Provided, however, 
That such deposits shall bear interest at the rate of six per 
centum per annum from and after such insolvency or failure 
to pay deposits until paid. 

Sect. 2. That whenever any national bank which accepts 
the provisions of this Act shall become insolvent or is unable 
to pay its deposits, in whole or in part, it shall be the duty 
of the Comptroller of the Currency, in addition to the duties 
now devolved upon him by law with reference to insolvent or 
failed banks, as speedily as practicable to assess all national 
banks which have accepted the provisions of this Act their pro 
rata of the indebtedness due depositors by such bank, as pro- 
vided in the foregoing section, and to collect and pay the same 
to the depositors entitled thereto. The necessary expenses in- 
cident to the enforcement of this Act shall be paid as in other 
cases of insolvent or failed banks: Provided, That the de- 
positors shall be paid in full: Provided further, That after ex- 
hausting all the resources of such insolvent or failed bank and 
the liabilities of the stockholders therein, and paying all neces- 
sary expenses incident to the settlement of the affairs of such 
bank, the Comptroller of the Currency shall refund to the re- 
spective banks which contributed their pro rata to the payment 
of the deposits in such insolvent or failed bank the balance, 
if any, in proportion to the contributions of such banks. 

Sect. 3. That immediately after the passage of this Act 
the Comptroller of the Currency shall address a communica- 
tion to each national bank then in operation, enclosing a copy 



334 APPENDIX 

of this Act, inquiring if the bank will accept the provisions 
thereof. All communications of the banks in reply to such 
inquiry shall be filed and preserved by the Comptroller of the 
Currency as part of the archives of his office. The banks 
which accept the provisions of this Act shall be held and bound 
thereby and the liability may be enforced by the Comptroller 
of the Currency. In case any bank shall decline to accept 
the provisions of this Act, or shall fail to reply to the com- 
munication of the Comptroller of the Currency on the subject 
within twenty days, such bank and the depositors therein 
shall be denied all benefits arising under this Act: Provided, 
That as additional national banks are organized they shall 
have ten days from the date of their charters to avail them- 
selves of the provisions of this Act, and upon failure to file 
their acceptance thereof within that time such bank and their 
depositors shall be denied all benefits arising thereunder. 

Sect. 4. That as acceptances of the provisions of this Act 
are received by the Comptroller of the Currency, it shall be 
his duty to issue to each bank which accepts the same a cer- 
tificate under his hand and seal stating substantially the fact 
of acceptance, and said certificate shall expressly state that the 
deposits of the bank are further protected by this Act, which 
certificate may be published by the bank. It shall also be 
the duty of the Comptroller of the Currency to transmit to 
the Congress, at the beginning of each session, the name and 
location of each national bank which has accepted the pro- 
visions of this Act, and the name and location of each national 
bank which has declined or failed to accept the same. 

Sect. 5. That no public money shall be deposited or re- 
main in any national bank which declines or fails to accept 
the provisions of this Act. 

Sect. 6. That nothing in this Act shall be taken, held, or 
construed as implying or fixing any liability upon the United 
States to guarantee deposits in any national bank, and it is 
hereby declared that the extent of the obligation of the United 
States is to enforce this Act. 



APPENDIX 335 

S- 3539 
IN THE SENATE OF THE UNITED STATES 

January 13, 1898 

Mr. Gore introduced the following bill; which was read twice 
and referred to the Committee on Finance. 

A BILL AUTHORIZING NATIONAL BANKING ASSOCIATIONS TO 
CONFORM TO STATE LAWS LEVYING A TAX OR ASSESSMENT 
TO SECURE DEPOSITORS. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That whenever any State enacts a law levying a tax or an 
assessment on State banks for the purpose of raising a fund to 
be used to protect the depositors in such banks from loss, all 
national banks in such State may be permitted to enjoy the 
benefits of such law by paying out of their earned surplus their 
pro rata share of such assessment upon such terms and condi- 
tions as the Secretary of the Treasury may prescribe, and it 
shall be the duty of the Secretary of the Treasury to promul- 
gate such rules as may be necessary to carry the provisions 
of this Act into effect. 

S. 3804 

IN THE SENATE OF THE UNITED STATES 

January 14, 1908 

Mr. Scott introduced the following bill; which was read twice 
and referred to the Committee on Finance. 

A BILL TO TAX CERTAIN DEPOSITS WITH NATIONAL BANK- 
ING ASSOCIATIONS, AND FOR OTHER PURPOSES. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled'. 

That whenever any national banking association shall re- 
ceive from the Secretary of the Treasury, under the author- 
ity vested in him by section fifty-one hundred and fifty-three 



336 APPENDIX 

of the Revised Statutes, as amended by section three of the 
Act approved March fourth, nineteen hundred and seven, 
entitled, "An Act to amend the national banking Act, and 
for other purposes," or by any other provision of law now 
existing or hereafter enacted, any deposits of public money, 
such banking association shall be, and is hereby, made sub- 
ject to a tax of one twenty-fourth of one per centum per month 
upon the average amount of such deposits so received and 
held by it as hereinafter provided, the tax hereby levied being 
in addition to any and all other taxes imposed by law upon 
national banking associations. 

Sect. 2. That it shall be the duty of each national bank- 
ing association with whom the Secretary of the Treasury shall 
make deposits of public moneys as aforesaid to render a re- 
turn in duplicate, under the oath of the president or cashier 
of said banking association, in such form and manner as may 
be prescribed by the Commissioner of Internal Revenue, 
with the approval of the Secretary of the Treasury, one copy 
of which return shall be deposited with the collector of in- 
ternal revenue of the internal-revenue collection district in 
which such banking association is located and one copy trans- 
mitted to the Commissioner of Internal Revenue. Such 
return shall be made semi-annually on the first day of Decem- 
ber and the first day of June of each year, and shall set out the 
average monthly amount of the deposits aforesaid so received 
and held by such banking association. The copy of said 
return which is to be deposited with the collector of internal 
revenue as aforesaid shall be accompanied by the amount 
of the tax shown to be due by said return. 

Sect. 3. That in default of the return herein provided for 
the Commissioner of Internal Revenue shall estimate the 
amount of the deposits received and held by any such bank- 
ing association upon the best information he can obtain, in- 
cluding information of such deposits secured from the Secretary 
of the Treasury; and the tax found due upon such estimate 
shall be assessed and collected as in other cases of default 



APPENDIX 337 

under the internal-revenue laws. And for refusal or neglect 
to make the return or payment herein provided for the bank- 
ing association shall pay a penalty of two hundred dollars for 
every such default, to be collected by distraint. 

Sect. 4. That the amounts collected as tax under the pro- 
visions of this Act shall constitute a special fund in the Treas- 
ury of the United States to be denominated the depositors' 
surety fund, which fund shall be held to the order of the Sec- 
retary of the Treasury, to be used by him under such regu- 
lations as he may promulgate, to reimburse depositors in 
national banks, either in full or in such pro rata part as the 
condition of the said fund may allow, for loss occasioned by 
the failure of any national banking association, and for no other 
purpose except such as may be specifically authorized by 
law. 

Sect. 5. That all existing provisions of law for the assess- 
ment and collection of internal-revenue taxes, so far as ap- 
plicable, are hereby made a part of this Act. 

S. 3807 

IN THE SENATE OF THE UNITED STATES 

January 14, 1908 

Mr. Curtis introduced the following bill; which was read 
twice and referred to the Committee on Finance. 

A BILL AUTHORIZING NATIONAL BANKING INSTITUTIONS TO 
TAKE ADVANTAGE OF GUARANTEE BANK-DEPOSIT LAWS 
IN CERTAIN STATES, AND FOR OTHER PURPOSES. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 
That the Comptroller of the Currency be, and he is hereby, 
authorized and directed to issue a permit to any national 
banking institution doing business in States which have a 
guarantee bank-deposit law to take advantage of such law, 
provided said national banking institution is authorized to do 



338 APPENDIX 

so by a vote of the majority of the stock of said institution 
at a meeting of the stockholders called for that purpose. 

S. 1239 
IN THE SENATE OF THE UNITED STATES 

December 5, 1907 

Mr. Knox (by request) introduced the following bill; which 
was read twice and referred to the Committee on Finance. 

A BILL TO PROVIDE AN ELASTIC CURRENCY BY MAKING IT 
LAWFUL FOR ANY OR ALL HOLDERS OF GOLD COIN OF THE 
UNITED STATES OR OF BONDS OF THE UNITED STATES, OR OF 
BONDS OF ANY STATE, COUNTY, OR MUNICIPALITY WITHIN 
THE UNITED STATES WHICH MAY BE APPROVED BY THE 
SECRETARY OF THE TREASURY, TO DEPOSIT, THROUGH ANY 
NATIONAL BANKING ASSOCIATION, SAID COIN OR BONDS 
WITH THE TREASURER OF THE UNITED STATES, OR ANY 
ASSISTANT TREASURER, AND TO SECURE THEREFOR A 
NEW FORM OF LEGAL-TENDER GOVERNMENT NOTES CALLED 
"UNITED STATES CURRENCY NOTES"; PROVIDING FOR A 
TAX ON SAID DEPOSITORS OF BONDS WHILE SAID BONDS 
REMAIN ON DEPOSIT; AUTHORIZING NATIONAL BANKING 
ASSOCIATIONS, AT THE DISCRETION OF THE SECRETARY 
OF THE TREASURY, TO HOLD UNITED STATES BONDS, OR 
ANY STATE, COUNTY, OR MUNICIPAL BONDS WHICH MAY 
BE APPROVED BY HIM, AND WHICH ARE HEREBY MADE 
CONVERTIBLE, LN LIEU OF MONEY, FOR HALF OF THEIR 
LEGALLY REQUIRED RESERVES; AND AUTHORIZING NA- 
TIONAL BANKING ASSOCIATIONS TO CHARGE A COMMISSION 
FOR SERVICES HEREIN PROVIDED FOR. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That the Secretary of the Treasury is hereby authorized and 
required, as rapidly as practicable, to cause to be provided 
and kept in readiness for issuing, upon such demand or de- 



APPENDIX 330 

mands as may be made, according to the provisions of this Act, 
a supply of circulating notes to be known as United States 
currency notes. Said notes, in the payment of all debts, 
either public or private, shall be legal tender for a dollar of 
twenty-five and eight-tenths grains of gold, nine-tenths fine, 
for each dollar they represent, and when presented to the 
United States Treasury they shall be redeemed in gold coin 
of the United States; and when so redeemed they may be re- 
issued in the manner provided in this Act for their first issue. 
Said notes shall be provided in sufficient quantites to insure 
there being stored in the Treasury and subtreasuries at all 
times ready for issue an amount of them equivalent to five 
hundred millions of dollars, and they shall be issued only 
when secured by deposits of bonds, as provided in section 
three of this Act, or in exchange for gold coin of the United 
States. United States currency notes when held by any na- 
tional banking association may be counted as a part of its 
lawful reserve. 

Sect. 2. That in order to furnish suitable notes for circu- 
lation, the Secretary of the Treasury shall cause plates and 
dies to be engraved in the best manner to guard against coun- 
terfeiting and fraudulent alterations, and shall have printed 
therefrom and numbered such quantity of circulating notes 
of the denominations of five dollars, ten dollars, twenty dol- 
lars, fifty dollars, one hundred dollars, five hundred dollars, 
one thousand dollars, five thousand dollars, and ten thou- 
sand dollars as may be required to supply the demands of 
those entitled to receive the same. Such notes shall express 
upon their face or back: — 

First. That they are secured by gold coin, or by bonds 
deposited with the Treasurer of the United States. 

Second. That in payment of all debts, either public or 
private, they are legal tender for a dollar of twenty-five and 
eight-tenths grains of gold, nine-tenths fine, for each dollar 
they represent. 

Third. That United States currency notes, if presented 



340 APPENDIX 

to the Treasurer of the United States, shall be payable in gold 
coin of the United States. 

Fourth. The engraved signatures of the Treasurer and 
Register and the imprint of the seal of the Treasury. 

Fifth. Such devices and such other statements, not in- 
consistent with the provisions of this Act, as the Secretary of 
the Treasury shall, by regulation, direct. 

Sect. 3. That any and all national banking associations, 
saving institutions, State banks, trust companies, or other 
corporations, or firms, or individuals, so desiring may deposit 
with the Treasurer of the United States, or any assistant 
treasurer, bonds of the United States, or of any State, county, 
or municipality in the United States which may be approved 
by the Secretary of the Treasury, and such depositors shall 
receive in exchange for the bonds deposited United States 
currency notes, such as are provided for by sections one and 
two of this Act, in amounts equal to ninety-five per centum 
in the case of United States bonds, and to seventy-five per 
centum in the case of State, county, and municipal bonds, 
of the par value of the bonds deposited: Provided, however, 
That should the market value of such bonds, in the judgment 
of the Secretary of the Treasury, be or become depreciated 
below their par value, the Treasurer of the United States is 
hereby directed to require the depositor to deposit in addi- 
tion lawful money of the United States equal to the depreci- 
ation of the market value of said bonds below their par value; 
and should the depositor fail to promptly make the said ad- 
ditional deposits of lawful money, or should he fail for three 
months to pay the tax hereinafter provided for, the Treasurer 
of the United States is hereby required to sell said bonds at 
public sale. Each depositor of bonds under the provisions 
of this Act shall pay quarterly, on the first days of March, 
June, September, and December, to the Treasurer of the 
United States, a tax equal to five per centum per annum, if 
United States bonds are deposited, and to seven per centum per 
annum if other bonds are deposited, on the amount of said 



APPENDIX 341 

notes received by him during the time said bonds remain on 
deposit, and each depositor shall receive all interest on said 
bonds the same as though they were in his own possession. 
All money received by the Treasury Department in payment 
of the tax herein provided for shall be used for the pur- 
chase of gold coin, and said gold coin shall be added to the 
separate fund for the redemption of United States currency 
notes. 

Sect. 4. That any depositor of bonds under this Act, or 
his lawful representative, successors, or assigns, may at any 
time demand and receive the bonds deposited, or the proceeds 
of their sale, as provided by this Act, together with any and 
all deposits of lawful money which the depositor may have 
been required to make, upon the return to the Treasurer of 
the United States of an amount of United States currency 
notes or of gold coin of the United States equal to the face 
value of the notes received by the said depositor and the un- 
paid tax, as herein provided. Any gold coin received by the 
Treasury Department under the operations of sections one, 
four and six of this Act shall be placed into a separate fund 
and used only for the redemption of the United States cur- 
rency notes herein provided for. So much of the redemption 
fund provided for by the Act of March fourteen, nineteen hun- 
dred, as shall be necessary for the redemption of any of these 
notes shall be temporarily transferred to this separate fund, 
and replaced as soon as possible. 

Sect. 5. That on and after the passage of this Act national 
banking associations, in emergencies and with the approval 
of the Secretary of the Treasury, may hold and count as fifty 
per centum of their legally required cash reserves, an amount 
of United States bonds or of any State, county, or municipal 
bonds which may be approved by the Secretary of the Treas- 
ury for the purposes enumerated in section three of this Act 
and by this Act made convertible, which in the case of United 
States bonds at ninety-five per centum of their par value, and 
in the case of State, county, and municipal bonds at seventy- 



342 APPENDIX 

five per centum of their par value, will be equivalent in amount 
of fifty per centum of said legally required reserves. 

(Note. — The whole of section five could be discarded 
without interfering with the principal purpose of the bill.) 

Sect. 6. That in order to extend the privileges of this 
Act to any and all holders of bonds herein mentioned, and 
to facilitate its operations, national banking associations, at 
the request of any savings institution, State bank, trust com- 
pany, corporation, firm, or individual, shall from them receive 
deposits of any bonds, notes or coin, mentioned in this Act, 
and shall for and in the name of such depositor forward said 
bonds, notes, or coin to the United States Treasury or to the 
nearest subtreasury, and shall receive from the Treasury or 
subtreasury and deliver to the said depositor the bonds, notes, 
or coin in exchange; and for this service national banking 
associations may charge said depositors a commission of not 
more than one-fifth of one per centum over and above all 
actual and necessary expenses, said commission to be calcu- 
lated upon the par value of the bonds, notes, and coin handled. 

(Note. — The whole of section six could be discarded 
without interfering with the principal purpose of the bill.) 

Sect. 7. That all Acts or parts of Acts inconsistent here- 
with are hereby repealed. 

S. 3023 

IN THE SENATE OF THE UNITED STATES 

January 7, 1908 

Mr. Aldrich introduced the following bill; which was read 
twice and referred to the Committee on Finance. 

A BILL TO AMEND THE NATIONAL BANKING LAWS. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That any national banking association which has circulat- 
ing notes outstanding, secured by the deposit of United States 
bonds to an amount of not less than fifty per centum of its 



APPENDIX 343 

capital stock, and which has a surplus of not less than twenty 
per centum, may make application to the Comptroller of the 
Currency for authority to issue additional circulating notes 
to be secured by the deposit of bonds other than bonds of the 
United States. The Comptroller of the Currency, if in his 
judgment business conditions demand such additional cir- 
culation and the condition of the association making the ap- 
plication warrants the issue, may approve such application 
and shall determine the time of issue and shall fix the amount, 
within the limitations hereinafter imposed, of such additional 
circulating notes to be issued. Whenever after receiving no- 
tice of such approval any such association shall deposit with 
the Treasurer or any assistant treasurer of the United States 
such of the bonds described in section two of this act as shall 
be approved in character and amount by the Treasurer of 
the United States and the Secretary of the Treasury, it shall 
be entitled to receive, upon the order the Comptroller of the 
Currency, circulating notes in blank, registered and counter- 
signed as provided by law, equal in amount to seventy-five 
per centum of the market value, as fixed by the Treasurer 
of the United States, of the bonds so deposited, such addi- 
tional circulating notes to be used, held, and treated in the 
same way as circulating notes of national banking associa- 
tions heretofore issued and secured by a deposit of United 
States bonds, and shall be subject to all the provisions of law 
affecting such notes: Provided, That the amount of such 
additional circulating notes delivered at any time to any asso- 
ciation shall not in any case exceed the limit fixed for such 
issue by the Comptroller of the Currency: And provided fur- 
ther, That the total amount of circulating notes outstanding 
of any national banking association, secured by United States 
bonds or otherwise, shall not at any time exceed the amount 
of its unimpaired capital and surplus: And provided further, 
That there shall not be outstanding at any time circulating 
notes issued under the provisions of this Act to an amount 
of more than two hundred and fifty million dollars: And 



344 APPENDIX 

provided further, That all acts and orders of the Comptroller 
of the Currency and the Treasurer of the United States author- 
ized by this section shall have the approval of the Secretary 
of the Treasury. 

Sect. 2. That the Treasurer of the United States, with 
the approval of the Secretary of the Treasury, may accept 
as security for the additional circulating notes provided for 
in the preceding section, bonds or other interest-bearing ob- 
ligations of any State of the United States, or any legally 
authorized bonds issued for municipal purposes by any city 
or county in the United States which has been in existence 
as a city or county for a period of fifteen years, and which 
for a period of ten years previous to such deposit has not 
defaulted in the payment of any part of either principal or 
interest of any funded debt authorized to be contracted by it, 
and which has at such date more than twenty thousand inhab- 
itants as established by the last national census, and whose 
net indebtedness does not exceed ten per centum of the valu- 
ation of the taxable property therein, to be ascertained by 
the last preceding valuation of property for the assessment 
of taxes: or the first-mortgage bonds of any railroad com- 
pany, not including street-railway bonds, which has paid 
dividends of not less than four per centum per annum reg- 
ularly and continuously on its entire capital stock for a period 
of not less than five years previous to the deposit of the bonds. 
The Treasurer of the United States, with the approval of the 
Secretary of the Treasury, may accept, for the purposes of 
this Act, securities herein enumerated in such proportions as 
he may from time to time determine, and he may at any time 
require the deposit of additional securities, or require any 
association to change the character of the securities already 
on deposit. 

Sect. 3. That all bonds deposited to secure circulating 
notes issued in accordance with the terms of this Act shall be 
transferred to the Treasurer of the United States in trust for 
the association depositing them, with a memorandum to that 



APPENDIX 345 

effect attached to or written or printed on each bond, and 
signed by the cashier or some other officer of the association 
making the deposit. A receipt shall be given to the associa- 
tion by the Comptroller of the Currency, or by a clerk ap- 
pointed by him for that purpose, stating that such bond is 
held in trust for the association on whose behalf the transfer 
is made, and as security for the redemption and payment of 
any circulating notes that have been or may be delivered to 
such association. No assignment or transfer of any such bond 
by the Treasurer shall be deemed valid unless countersigned 
by the Comptroller of the Currency. The provisions of sec- 
tions fifty-one hundred and sixty-three, fifty-one hundred 
and sixty-four, fifty-one hundred and sixty-five, fifty-one hun- 
dred and sixty-six, fifty-one hundred and sixty-seven of the 
Revised Statutes respecting United States bonds deposited to 
secure circulating notes shall, except as herein modified, be 
applicable to all bonds deposited under the terms of this Act. 

Sect. 4. That section fifty-two hundred and fourteen of 
the Revised Statutes, as amended, be further amended to 
read as follows: 

"Sect. 5214. National banking associations having on 
deposit bonds of the United States, bearing interest at the 
rate of two per centum per annum, including the bonds issued 
for the construction of the Panama Canal, under the provi- 
sions of section eight of 'An Act to provide for the construc- 
tion of a canal connecting the waters of the Atlantic and 
Pacific oceans,' approved June twenty-eighth, nineteen hun- 
dred and two, to secure its circulating notes, shall pay to the 
Treasurer of the United States, in the months of January 
and July, a tax of one-fourth of one per centum each half 
year upon the average amount of such of its notes in circula- 
tion as are based upon the deposit of such bonds; and such 
associations having on deposit bonds bearing interest at a 
rate higher than two per centum per annum shall pay a tax 
of one-half per centum each half year upon the average amount 
of such of its notes in circulation as are based upon the 



346 APPENDIX 

deposit of such bonds. National banking associations having 
on deposit bonds to secure their circulating notes other than 
bonds of the United States shall pay a monthly tax of one-half 
of one per centum upon the average amount of such of their 
notes in circulation as are based upon the deposit of such 
bonds. Every national banking association having outstand- 
ing circulating notes secured by a deposit of bonds other 
than bonds of the United States shall make monthly returns, 
under oath of its president or cashier, to the Treasurer of the 
United States, in such form as the Treasurer may prescribe, 
of the average monthly amount of its notes so secured in cir- 
culation. The taxes received on circulating notes secured 
by bonds other than bonds of the United States shall be paid 
into the Division of Redemption of the Treasury and credited 
to the reserve fund held for the redemption of the United States 
and other notes.' ' 

Sect. 5. That section nine of the Act approved July twelfth, 
eighteen hundred and eighty-two, as amended by the Act 
approved March fourth, nineteen hundred and seven, be fur- 
ther amended to read as follows: 

"Sect. 9. That any national banking association desiring 
to withdraw its circulating notes, secured by deposit of United 
States bonds in the manner provided in section four of the 
Act approved June twentieth, eighteen hundred and seventy- 
four, is hereby authorized for that purpose to deposit lawful 
money with the Treasurer of the United States and, with the 
consent of the Comptroller of the Currency and the approval 
of the Secretary of the Treasury, to withdraw a proportional 
amount of bonds held as security for its circulating notes in 
the order of such deposits; and in like manner and effect 
any such association desiring to withdraw any of its circulat- 
ing notes, secured by the deposit of bonds other than bonds 
of the United States, may make such withdrawal at any time 
by the deposit of lawful money or national bank notes with 
the Treasurer of the United States, and upon such deposit a 
proportionate share of the bonds so deposited may be with- 



APPENDIX 347 

drawn: Provided, That the provisions of this section shall 
not apply to United States bonds called for redemption by 
the Secretary of the Treasury, not to withdrawal of circulating 
notes in consequence thereof." 

Sect. 6. That section fifty-one hundred and seventy-two 
of the Revised Statutes be, and the same is hereby, amended 
to read as follows: 

"Sect. 5172. In order to furnish suitable notes for cir- 
culation, the Comptroller of the Currency shall, under the 
direction of the Secretary of the Treasury, cause plates and 
dies to be engraved, in the best manner to guard against 
counterfeiting and fraudulent alterations, and shall have 
printed therefrom, and numbered, such quantity of circula- 
ting notes, in blank, of the denominations of five dollars, ten 
dollars, twenty dollars, fifty dollars, one hundred dollars, five 
hundred dollars, one thousand dollars, and ten thousand dol- 
lars, as may be required to supply the associations entitled 
to receive the same. Such notes shall state upon their face 
that they will be redeemed by the United States in lawful 
money upon presentation at the Treasury. This pledge 
shall be certified by the written or engraved signatures of 
the Treasurer and Register, and by the imprint of the seal 
of the Treasury. They shall also express upon their face 
the promise of the association receiving the same to pay on 
demand, attested by the signature of the president or vice- 
president and cashier. Upon request of any national bank- 
ing association the Comptroller of the Currency, under the 
direction of the Secretary of the Treasury, shall cause to be 
prepared circulating notes in blank, registered and counter- 
signed, as provided by law, to an amount equal to fifty per 
centum of the capital stock of such association; such notes to 
be deposited in the Treasury or the subtreasury of the United 
States nearest the place of business of the association making 
the request, and to be held for such association, subject to 
the order of the Comptroller of the Currency, for their deliv- 
ery as provided by law." 



348 APPENDIX 

Sect. 7. That circulating notes of national banking as- 
sociations, when presented to the Treasury for redemption, 
as provided in section three of the Act approved June twen- 
tieth, eighteen hundred and seventy-four, shall be redeemed 
in lawful money of the United States. 

Sect. 8. That national banking associations located out- 
side of reserve or central reserve cities, which are now re- 
quired by law to keep a reserve equal to fifteen per centum of 
their deposit liabilities, shall hereafter hold at all times at 
least two-thirds of such reserve in lawful money. The pro- 
visions of section fifty-one hundred and ninety-one of the Re- 
vised Statutes, with reference to the reserves of national 
banking associations, shall not apply to deposits of public 
moneys by the United States in designated depositaries. 



S. 3026 
IN THE SENATE OF THE UNITED STATES 

January 7, 1908 

Mr. Culberson introduced the following bill; which was read 
twice and referred to the Committee on Finance. 

A BILL TO AMEND SECTION THREE OF THE ACT ENTITLED 
a AN ACT TO AMEND THE NATIONAL BANKING ACT, AND 
FOR OTHER PURPOSES," APPROVED MARCH FOURTH, NINE- 
TEEN HUNDRED AND SEVEN, AND FOR OTHER PURPOSES. 

Be it enacted by the Senate and the House of Representatives of the 
United States of America in Congress assembled: 

That section three of the Act entitled " An Act to amend the 
national banking Act, and for other purposes," approved 
March fourth, nineteen hundred and seven, be amended so as 
to read as follows: 

"Sect. 3. That section fifty-one hundred and fifty-three 
of the Revised Statutes be amended to read as follows: 

Sect. 5153. All national banking associations, designated 



APPENDIX 349 

for that purpose by the Secretary of the Treasury, shall be 
depositaries of public money, under such regulations as 
may be prescribed by the Secretary; and they may also be 
employed as financial agents of the Government; and they shall 
perform all such reasonable duties, as depositaries of public 
money and financial agents of the Government, as may be 
required of them. The Secretary of the Treasury shall re- 
quire the associations thus designated to give satisfactory 
security, by the deposit of United States bonds and otherwise, 
for the safe-keeping and prompt payment of the public money 
deposited with them, and for the faithful performance of their 
duties as financial agents of the Government: Provided, That 
the Secretary shall, on or before the first of January of each 
year, make a public statement of the securities required dur- 
ing that year for such deposits. And every association so 
designated as receiver or depositary of the public money 
shall take and receive at par all of the national currency bills, 
by whatever association issued, which have been paid into 
the Government for internal revenue, or for loans or stocks: 
Provided, That the Secretary of the Treasury shall distribute 
the deposits herein provided for, as far as practicable, equi- 
tably between the different States and sections: Provided 
further, That whenever public money is deposited in national 
banks under authority of this section, said banks shall pay to 
the United States interest on such deposits, to be collected by 
the Secretary of the Treasury, as follows: For the months 
of August, September, October, and November of each year 
at the rate of two per centum per annum; for the months of 
December, January, February, and March of each year at 
the rate of four per centum per annum; and for the months 
of April, May, June and July of each year at the rate of six 
per centum per annum." 



350 APPENDIX 

S. 3472 
IN THE SENATE OF THE UNITED STATES 

January 9, 1908 

Mr. Bulkeley introduced the following bill; which was read 
twice and referred to the Committee on Finance. 

A BILL TO PROVIDE FOR EMERGENCY CIRCULATION OF NA- 
TIONAL BANKING ASSOCIATIONS. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 
That whenever, in the discretion of the Secretary of the 
Treasury, a necessity or emergency exists therefor, he may 
authorize any national banking association to receive from 
the Comptroller of the Currency, in such form and under such 
regulations as he may prescribe, circulating notes in blank, 
registered and countersigned as provided by law, equal in 
amount to the par value of bonds to be deposited with the 
Treasurer of the United States in the manner provided by 
existing law; such bonds to be deposited, in addition to United 
States bonds and Panama Canal bonds now authorized by 
law, may be the bonds of any State or county or of any city, 
town, or municipal corporation of not less than fifty thousand 
population, on which bonds the rate of interest is not less 
than three and one-half per centum per annum, and on which 
bonds there has never been default in the payment of either 
the principal or interest: Provided, That no bonds of any 
State or county or of any city, town, or municipal corporation 
shall be received for deposit that have defaulted in the pay- 
ment of either the principal or interest on any bonds previ- 
ously issued by them, the amount of such bonds so deposited 
not to exceed the capital stock paid in of any such banking 
institution: Provided further, That the aggregate amount of 
circulation of any banking association making such deposit 
shall not exceed the amount of its unimpaired capital: Pro- 
vided further, That the circulating notes furnished to national 



APPENDIX 351 

banking associations under the provisions of this Act shall 
be of denominations prescribed by law, or of such other de- 
nominations or proportions as the Secretary of the Treasury, 
in his discretion, may prescribe, and subject, otherwise than 
herein prescribed, to existing laws governing such issue and 
circulation of the notes of national banking associations: 
Provided further, That any national banking association issu- 
ing any such circulating notes, which notes may be outstand- 
ing one year from the date of issue, shall pay a tax of ten per 
centum on such circulating notes outstanding, such tax to 
commence from the date of issue, and an additional tax of 
five per centum for every period of six months in excess of 
the one year such circulating notes may remain outstanding: 
Provided further, That any persons, firms, associations, cor- 
porations, State banks or State banking associations, and also 
every national banking association other than the bank of 
issue, shall pay a like tax of ten per centum on the amount of 
such notes so held, to commence from the date of issue, and 
a like additional tax of five per centum for every period of 
six months in excess of the one year such circulating notes 
may have remained outstanding: Provided further, That the 
amount of such circulating notes and the tax due thereon shall 
be returned and the tax paid at the same time and in the 
same manner and with the like penalties as provided by law 
for the return and payment of taxes on deposits, capital, and 
circulation imposed by the existing conditions of internal- 
revenue law. 



352 APPENDIX 

S. R. 25 
IN THE SENATE OF THE UNITED STATES 

January 9, 1908 

Mr. Clay introduced the following joint resolution; which 
was read twice and referred to the Committee on Finance. 

JOINT RESOLUTION for the issue of three hundred 

AND FIFTY MILLIONS OF TREASURY NOTES. 

Resolved by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That the Secretary of the Treasury be, and he is hereby, au- 
thorized and directed to issue on the credit of the United 
States the sum of three hundred and fifty millions of dollars 
of United States notes in addition to the United States notes 
now in circulation and authorized by law in such form as he 
may deem expedient, not bearing interest, payable to the 
bearer on demand, and of such denominations not less than 
one dollar, as he may prescribe, and such notes so issued shall 
be lawful money and a legal tender in the payment of all 
debts, public and private, within the United States. And 
said notes shall be deposited in depositories designated under 
existing law by the Secretary of the Treasury. The Secre- 
tary of the Treasury shall require the banking associations 
designated as depositories for said notes to give satisfactory 
security by the deposit of United States bonds, State, county, 
or municipal bonds for the safe keeping and prompt payment 
of the public money thus deposited and for the faithful per- 
formance of their duties as financial agents of the Govern- 
ment. And said depositories receiving any part of said sum 
shall pay to the Government of the United States interest on 
the amount so deposited of not less than five per centum. And 
the Secretary of the Treasury shall distribute the deposits 
herein provided for, as far as practicable, equitably between 
the different States and sections in proportion to population. 



APPENDIX 353 

S. 3988 
IN THE SENATE OF THE UNITED STATES 

January 15, 1908 

Mr. Owen introduced the following bill; which was read twice 
and referred to the Committee on Finance. 

A BILL PROVIDING A MEANS FOR THE INSURANCE OF THEIR 
DEPOSITS BY THE NATIONAL BANKING ASSOCIATIONS OF 
THE UNITED STATES AND THE EXPANSION OF A BOND- 
SECURED CURRENCY UNDER AN INTEREST CHARGE COM- 
PELLING THE CONTRACTION OF THE EXPANSION SO 
PROVIDED. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That from and after the passage of this Act the Comptroller 
of the Currency shall require the national banking associa- 
tions of the United States to pay into the Treasury of the 
United States a tax upon their deposits, as fixed by the office 
of the Comptroller of the Currency, in a sum amply sufficient 
to provide a fund for the immediate payment of the depos- 
itors in full of any insolvent bank. Such fund shall be called 
the "liquidation fund," and from such fund, whenever a 
national bank is declared insolvent by the Comptroller of the 
Currency, the depositors of such bank shall be paid in full 
immediately from such "liquidation fund," and such liqui- 
dating bank be charged therewith. The net liquidated assets 
of such bank shall be deposited to the credit of the "liquida- 
tion fund" to the extent required to reimburse such fund the 
money advanced therefrom: Provided, That no deposit under 
contract to bear interest in excess of four per centum per 
annum on time or two per centum per annum on current 
account shall be included in the insurance provided by this 
Act, and such deposit shall not be paid out of the "liquida- 
tion fund" herein provided for. 



854 APPENDIX 

Sect. 2. That the Secretary of the Treasury is hereby 
directed to prepare and keep on hand not less than one hun- 
dred million dollars of Treasury notes of the United States, 
to be kept in a special fund known as the "special circulation 
fund." Such notes may be advanced to any person or cor- 
poration upon proper security of bonds belonging to the classes 
of bonds as fixed by law, and which are acceptable to the 
Comptroller of the Currency, and approved by the Secretary 
of the Treasury: Provided, That such advances shall not be 
in excess of eighty-five per centum of the market value of 
such bonds. That the Comptroller of the Currency, with 
the approval of the Secretary of the Treasury, may accept, 
as security for the Treasury notes herein provided for, the 
bonds or other interest-bearing obligations of the United States 
or of any state of the United States, or any legally authorized 
bonds issued for municipal purposes by any city or county 
in the United States which has been in existence as a city or 
county for a period of fifteen years and which has never within 
that time defaulted in the payment of any part of the principal 
or interest of any such indebtedness authorized to be con- 
tracted by it and which has at such date more than twenty 
thousand inhabitants as established by the last national cen- 
sus and whose net indebtedness does not exceed ten per 
centum of valuation of the taxable property therein, to be 
ascertained by the last preceding valuation of property for 
the assessment of taxes. 

Such advances made from the "special circulation fund" 
shall be charged for at a rate of six per centum per annum 
for the first four months and thereafter at the rate of eight 
per centum per annum, not exceeding a total period of one 
year. In the event of the depreciation of the market value 
of such bonds, further security shall be required to preserve 
the margin of ten per centum, under penalty of sale of such 
securities on the open market. The advances made from 
such fund shall be repaid within twelve months, and in de- 
fault thereof the bonds shall be sold, and after the repayment 



APPENDIX 355 

of the principal and interest of such advances and the cost 
of sale the balance shall be returned to the owner of such 
bonds. The amount of the special circulation notes in the 
Treasury shall at no time be allowed to diminish to a point 
of exhaustion. The interest accruing on the loan of such 
special circulation notes shall go into the "liquidation fund" 
hereinabove provided. 

S. 108 
IN THE SENATE OF THE UNITED STATES 

December 4, 1907 

Mr. Platt introduced the following bill; which was read twice 
and referred to the Committee on Finance. 

A BILL TO PROTECT AND SUPPORT COMMERCIAL CREDIT, TO 
EQUALIZE RATES OF INTEREST, TO PROVIDE FOR THE IN- 
CORPORATION OF CLEARING HOUSES, TO REGULATE AND 
DEFINE THEIR OPERATIONS, TO PROVIDE A CLEARING- 
HOUSE CURRENCY SECURED BY PLEDGE OF COMMERCIAL 
ASSETS AND THE RESPONSIBILITY OF THE ASSOCIATED 
BANKS, AND TO PROVIDE FOR THE CIRCULATION AND RE- 
DEMPTION THEREOF. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

LOCAL NATIONAL CLEARING-HOUSE ASSOCIATIONS 

That associations to be known as national clearing houses, 
for the settlement of money transactions by effecting clearances 
between banks and for doing other business for and between 
banks not inconsistent with the provisions of this Act, may be 
formed by any number of banks not less than five, duly in- 
corporated, either under the national-bank Act, or under the 
laws of any State of which a majority shall be organized under 
the national-bank Act, in any city or town of not less than 
six thousand inhabitants, who shall enter into articles of as- 
sociation for the regulation of the business of the association 



356 APPENDIX 

and the conduct of its affairs, which said articles shall be 
approved by the stockholders of each bank uniting to form 
the association at a meeting called for the purpose, and shall 
be signed by the officers of each bank by authority conferred 
upon them to do so by vote of the stockholders, and a copy 
of them forwarded to the Comptroller of the Currency to be 
filed and preserved in his office. 

Sect. 2. That the banks uniting to form such an associa- 
tion shall, by their proper officers, make an organization cer- 
tificate, which shall specify — 

First. The name assumed by such association, which 
name shall be "The National Clearing House of 
(giving the name of the city or town where locate and where 
its business of effecting clearances shall be carried on). 

Second. The names, the amounts of capital stock, and 
the number of shares into which it is divided of the banks 
composing the association. 

Third. A declaration that said certificate is made to enable 
such banks to avail themselves of the advantages of this Act. 

The said certificate shall be acknowledged before a judge 
of some court of record or a notary public, and such cer- 
tificate, with the acknowledgment thereof authenticated by 
the seal of such court or notary public, shall be transmitted 
to the Comptroller of the Currency, who shall record and care- 
fully preserve the same in his office. Copies of such cer- 
tificate, duly certified by the Comptroller and authenticated 
by his seal of office, shall be legal and sufficient evidence in 
all courts and places within the United States or the juris- 
diction of the Government thereof of the existence of such 
association and of every other matter or thing which could 
be proved by the production of the original certificate. 

Sect. 3. That any banking association organized under 
the national-bank Act shall be entitled to membership in the 
clearing house of its locality organized under this Act on pre- 
senting to the said clearing house a certificate from the Comp- 
troller of the Currency that such an association has complied 



APPENDIX 357 

with all the provisions to be complied with before commencing 
the business of banking, and that such association is author- 
ized to commence such business; and any banking associa- 
tion organized under the laws of any state shall be entitled 
to membership in the clearing house of its locality on pre- 
senting a certificate from the superintendent of banking of 
said State that such association has complied with all the pro- 
visions of the State law required to be complied with before 
commencing the business of banking, and that such associa- 
tion is authorized to commence such business ; and any national 
or State bank in a locality in which there is no clearing 
association organized under this Act may be assigned to 
membership in the nearest or most convenient clearing-house 
association by the clearing house of issue of its State or Dis- 
trict hereinafter provided for in section nine of this Act : Pro- 
vided, That such State or Territorial banking associations shall 
maintain reserves as provided in sections ninety-four to one 
one hundred and five inclusive, of chapter five of the national- 
bank Act, as amended, or in any other part thereof. 

Sect. 4. That every association formed pursuant to the 
provisions of this Act shall, from the date of the execution of 
its organization certificate, be a body corporate, but shall 
transact no business except such as may be incidental to its 
organization, and necessarily preliminary, until authorized by 
the Comptroller of the Currency to commence the business of 
effecting clearances. Such association shall have power to 
adopt a corporate seal, and shall have succession by the name 
designated in its organization certificate for a period of 
twenty years from its organization, unless sooner dissolved 
according to the provisions of its articles of association or by 
the act of the banks owning two-thirds of the capital stock 
represented in the association, or unless the franchise shall 
be forfeited by a violation of this Act. By such name it may 
make contracts, sue and be sued, complain and defend in. 
any court of law or equity as fully as natural persons. It 
may elect or appoint directors, and by its board of directors 



358 APPENDIX 

appoint a president, vice-president, treasurer, and other of- 
ficers, define their duties, require bonds of them, and fix the 
penalty thereof; dismiss said officers, or any of them, at pleas- 
ure, appoint others to fill their places, and exercise under this 
Act all such incidental powers as shall be necessary to carry on 
the business of a clearing house for the settlement of money 
transactions by the mutual set-off of debits and credits, com- 
monly called making clearances for banks, and act for the 
members of the association in their united capacity when 
authorized to do so by a majority vote of said members; and 
its board of directors shall have power to define and regulate 
by by-laws not inconsistent with the provisions of this Act the 
manner in which its directors shall be elected or appointed, 
its officers appointed, its property transferred, its general 
business conducted, and all the privileges granted by this Act 
to associations organized under it shall be exercised and en- 
joyed; and its usual business shall be transacted at an office 
or banking house located in the place specified in its organ- 
ization certificate. 



NATIONAL CLEARING HOUSES OF ISSUE 

Sect. q. That the national clearing-house association 
organized under this Act, in the chief commercial city in each 
State, or in the city most central and convenient for business 
in each State, or any clearing house so organized effecting 
bank clearings of over five hundred and twenty million dol- 
lars annually, to be designated and approved by the Secre- 
tary of the Treasury, shall be made a clearing house of issue. 
And if there shall be more than one national clearing house 
of issue in a State, then the Secretary of the Treasury shall 
divide the State into a like number of clearing-house districts 
which shall be convenient for the business tributary to each 
clearing house of issue. The Secretary of the Treasury shall 
authorize the organization of a national clearing house of 
issue in any State or Territory in which there may not be a 



APPENDIX 359 

city or town having five banks duly incorporated under either 
the national-bank Act or under the laws of said State, and 
shall fix the location of same: Provided, That said national 
clearing house of issue shall be composed of not less than ten 
banks, none of whom shall have a capital less than the min- 
imum amount authorized by the national-bank Act and a 
majority of whom shall be organized under said national- 
bank Act. Banks in each State or District shall transact 
the business described in section ten of this Act only with 
the national clearing houses of issue in their State or District. 

At the annual meeting of the national clearing houses of 
issues there shall be elected a loan committee, whose duties 
shall be as described in sections ten and eleven of this Act. 
The loan committee shall be composed of six members, who 
shall be directors in banks which are members of any of the 
local national clearing-house associations or of the national 
clearing house of issue of the State or District. They shall 
be elected by a majority vote of the bank members of the na- 
tional clearing houses in the State or District present or rep- 
resented by proxy at the annual meeting. Each bank member 
shall be entitled to one vote for each one thousand dollars 
of its capital stock, which votes may be cast by a duly cer- 
tified officer of the bank in person or by proxy, duly attested 
by the bank. Members of this committee shall not be eli- 
gible for reelection until one year after their terms of office 
shall have expired. They shall be divided into three classes 
at their first election; one-third shall serve one year, one- 
third two years, and one-third three years, and at every elec- 
tion thereafter they shall be elected for a term of three years. 

Sect. io. That every clearing house of issue organized 
under this Act shall be authorized and empowered to obtain 
from the Comptroller of the Currency and issue to banks 
composing the national clearing-house associations within its 
State or District notes to be circulated as money in accord- 
ance with the provisions of this Act, and to act as trustees 
by receiving from bank members, and holding in trust in 



360 APPENDIX 

accordance with the provisions of this Act, securities pledged 
by said bank members as collateral to the circulating notes 
issued to them. The collateral securities which a national 
clearing house of issue may receive from its bank members, 
or from any bank member of a clearing house within its State 
or District, shall consist of commercial assets, promissory 
notes, bills of exchange, convertible bonds and stocks, and 
other securities and evidences of debt. On the approval of 
the loan and appraisement of the value of said commercial 
assets by its loan committee, the said clearing house of issue 
may deliver to said bank member seventy -five per centum of 
said value in its said circulating notes as an advance upon 
said pledged property, and shall require from said bank mem- 
ber its promissory note of equal amount, which note shall be 
in form as approved by said clearing house of issue. 

The bank member taking said circulating notes shall en- 
gage to redeem them in lawful money of the United States 
at all times upon demand of payment duly made during 
the usual hours of business at the office of such bank mem- 
ber, and also when called upon to do so by the clearing house 
issuing the notes, and to maintain with its clearing house of 
issue a five per centum reserve fund, as provided in section 
thirteen of this Act, and to give any additional collateral 
needed to restore any depreciation in the value of the assets 
pledged, on demand. On failure to comply with such de- 
mands before the close of business hours of the day when 
made, said bank member shall be adjudged in default, and 
shall be thereupon closed pending an examination by a com- 
mittee from the association which issued the notes. On 
recommendation by the examining committee the loan com- 
mittee shall proceed to liquidate the loan by turning the 
securities into cash, in accordance with the method provided 
in section eleven. 

The bank member taking said notes may release its secur- 
ities from pledge by depositing with the said clearing house 
of issue clearing-house currency, United States legal-tender 



APPENDIX 361 

notes, coin, or coin certificates, with any charges made by- 
said clearing house of issue, whereupon it shall be entitled 
to and shall receive all its securities so pledged. The charges 
shall be regulated by each national clearing house of issue. 
Upon the receipt of such deposit the national clearing house 
of issue shall immediately give notice in a newspaper pub- 
lished in the city, town, or county in which the association 
is located, which notice shall be published at least once a 
week for six months successively, that the notes of such bank 
member will be redeemed at par and that the circulating 
notes of such bank member must be so presented for redemp- 
tion within six years from the date of such notice; and all 
notes which shall not be thus presented for redemption and 
payment within the time specified in such notice shall cease 
to be a charge upon the funds in the hands of the national 
clearing house of issue for that purpose. At the expiration 
of such notice it shall be lawful for the national clearing house 
of issue to surrender and such bank member or its legal rep- 
resentative shall be entitled to receive all the money remain- 
ing after such redemption, except so much thereof as may 
be necessary to pay the reasonable expenses chargeable against 
the said accounts, including the payment for the publication 
of the above-mentioned notices. 

All circulating notes which shall be thus redeemed either 
by the national clearing house of issue or by the bank mem- 
ber shall be burned to ashes in the presence of three persons, 
one to be appointed by the Comptroller of the Currency, 
one by the national clearing house of issue, and one by the 
bank member on whose account they were issued; and a cer- 
tificate of such burning shall be made on the books of the 
national clearing house of issue and duplicates forwarded to 
the Comptroller of the Currency and to the bank member 
whose notes are thus cremated. 

Sect. ii. That each bank member taking such circulating 
notes shall guarantee the national clearing house of issue from 
loss resulting from such issue to them, and in case of a default 



362 APPENDIX 

in the payment of a loan when demanded by the national 
clearing house of issue or of a default arising in any other 
manner, then it shall be the duty of said clearing house of 
issue to levy upon all the national clearing houses in said 
State or District, in proportion to the capital of their bank 
members, a sufficient sum to provide for the payment of said 
loan, which sum shall be held for the payment and redemp- 
tion of the circulating notes so issued. And if enough money 
cannot be obtained by such assessments, then it shall be the 
duty of said national clearing house of issue to report to the 
Comptroller of the Currency the fact of said default, and it 
shall be his duty to levy a further assessment upon all the 
clearing houses organized under this Act in all the States until 
such sum is secured, in which case the funds so raised by the 
Comptroller shall be paid by him to the Treasurer of the 
United States as a special fund to pay the circulating notes of 
the defaulting bank member: and he shall appoint a receiver 
for the collateral securities to the loan or loans in default, 
who shall take possession thereof and turn them into cash 
and distribute the proceeds to the banks which have contrib- 
uted to the assessment, and any surplus after reimbursing 
them their advances shall be handed over to the bank mem- 
ber in default or its legal representative. 

But if the assessment by the clearing house of issue on the 
banks of its State or District is sufficient to provide the needed 
funds, then the collaterals shall be administered upon and 
turned into cash by the loan committee or by a liquidating 
committee of said clearing house of issue, and the cash pro- 
ceeds shall be appropriated as above provided. At no time 
shall the total amount of such notes issued to any bank mem- 
ber exceed the amount at such time actually paid in of the 
capital stock of the bank member so applying. And said 
loan committee are charged with the duty of supervising said 
loans so as to maintain the margin of the value of the collat- 
eral security, and shall demand additional securities to make 
good any depreciation in their value, and they may allow 



APPENDIX 363 

withdrawals and substitutions of securities which shall not 
diminish the said value. 

Sect. 12. That a national clearing house of issue shall be 
authorized and empowered to receive from its bank members 
gold coin of the United States of full weight and may deliver 
to said bank member its circulating notes of the par value 
of the gold coin so deposited, which notes shall indicate on 
their face that they are gold notes, and the said bank mem- 
ber shall engage to redeem said circulating notes at all times 
when called upon to do so by the association issuing them 
or on demand by the holder thereof at its office during the 
usual hours of business. Such gold notes may be issued to 
any bank member in exchange for gold coin without regard 
to the amount of the capital stock of the bank depositing the 
gold coin. Such notes issued against the deposit of gold coin 
may be held by any bank as a part of its lawful reserve. The 
clearing house of issue shall make report of gold notes so 
issued to the Comptroller of the Currency, and shall make 
no charges except for storage for the issue of its notes against 
the deposit of gold. 

Sect. 13. That every bank member of every association 
organized or to be organized under this Act shall at all times 
keep and have on deposit with its clearing house of issue as 
a reserve fund a sum in lawful money of the United States 
equal to five per centum of its circulating notes issued under 
this Act, excepting that no reserve fund shall be required against 
gold notes. Such five per centum reserve fund shall be held 
and used by the clearing house of issue for the redemption 
of the circulation issued to such bank member and the sum 
thereof shall be counted as part of its lawful reserve, and when 
the circulating notes of any such bank member shall be pre- 
sented to its clearing house of issue for redemption, the same 
shall be redeemed in lawful money of the United States. All 
notes so redeemed shall be charged to the bank member for 
whose account they were issued, and upon receipt of notice 
of such redemptions such bank member so notified shall 



364 APPENDIX 

forthwith deposit with its clearing house of issue a sum in 

lawful money of the United States equal to the amount of 

its circulating notes so redeemed. If any such notes are 

worn, mutilated, defaced, or rendered otherwise unfit for 

use, they shall be destroyed and replaced by new, as provided 

in section fifteen of this Act. And when such redemptions 

have been so reimbursed, the circulating notes so redeemed 

and the new notes issued in place of those destroyed shall be 

forwarded to the respective bank members on whose account 

they were issued. 

t • • • • 

S. 547 
IN THE SENATE OF THE UNITED STATES 

December 4, 1907 

M. Hansbrough introduced the following bill; which was 
read twice and referred to the Committee on Finance. 

A BILL PROVIDING FOR THE ESTABLISHMENT OF THE CEN- 
TRAL NATIONAL BANK OF THE UNITED STATES, AND FOR 
OTHER PURPOSES. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That there shall be established in the city of Chicago, State 
of Illinois, the Central National Bank of the United States, 
with a capital stock of ten per centum of the aggregate capital 
of all national banks. The said Central National Bank of 
the United States shall commence business on the first day 
of July, nineteen hundred and eight, and cease to exist on 
the thirtieth day of June, nineteen hundred and fifty-eight. 
Congress may extend the life of the bank beyond the date last 
named. 

The stock of said bank shall be non-negotiable and non- 
assignable, and shall be resold to the United States at par in 
case of the failure or liquidation of any bank owning the 
same. Any stock so repurchased by the United States shall 



APPENDIX 365 

be held in the Treasury as an asset to be resold to any 
national bank afterwards organized under existing law. 

The Secretary of the Treasury, the Comptroller of the 
Currency, the Treasurer of the United States, and the Director 
of the Mint are hereby directed to organize the Central Na- 
tional Bank of the United States in accordance with the pro- 
visions of this Act. 

Sect. 2. That any national bank may subscribe to the 
capital stock of the Central National Bank of the United 
States in the amount of ten per centum of the capital stock of 
the subscribing bank, and the stock so subscribed may, in 
the discretion of the Secretary of the Treasury, be counted as 
a part of the reserve fund of said bank. 

Sect. 3. That of that portion of the lawful reserves of na- 
tional banks which is authorized by existing law to be depos- 
ited in national banks of reserve and central reserve cities 
one-half may be deposited in the Central National Bank of the 
United States : Provided, That the said Central National Bank 
of the United States is hereby prohibited from paying interest 
on deposits except on deposits of the United States. 

Sect. 5. That the general council by a vote of fifteen of 
its members at any regular or special meeting may issue the 
demand notes of the Central National Bank of the United 
States in the form of currency, secured by the bills receivable 
or bonds owned by said bank, to an amount not exceeding 
three hundred million dollars, to be paid out from time to 
time as circumstances require. All notes issued by the said 
general council shall be redeemable on demand at the prin- 
cipal office of said bank or at any of its branches in gold coin. 
United States notes, gold certificates, or silver certificates, 
and when so redeemed and paid shall be canceled and de- 
stroyed. 

The general council may, in cases of unusual emergency, 
authorize the issue of notes in excess of the three hundred 
million dollars herein provided for, and all such excess issues 
shall be secured in full by gold deposited with the Treasurer 



366 APPENDIX 

of the United States. A tax at the rate of one-eighth of one 

per centum per annum shall be paid by the bank to the United 

States Government upon its circulating notes during the time 

the said notes are in use. All notes issued shall be printed 

by the Bureau of Engraving and Printing at the expense of 

the bank and delivered to the Comptroller of the Currency, 

who shall in turn deliver them to the officers of the bank and 

take their receipt therefor. 

• • • • • 

Sect. 6. That the Central National Bank of the United 
States may buy and sell foreign and domestic exchange; deal 
in gold and silver bullion, or advance cash upon the same. 
It may loan upon municipal, county, State, and such other 
high-grade bonds as have not defaulted in interest payments, 
during the preceding five years, but no loan upon this class of 
security shall exceed forty per centum of the market value 
of the same. It may advance money to solvent borrowers, 
secured upon grain or cotton in elevators or warehouses at 
terminal railroad points, when the said elevators or ware- 
houses are under State supervision, at sixty per centum of 
their market value. The said bank may advance money to 
the Government of the United States at such rate of interest 
as may be agreed upon between the members of the general 
council of said bank and the Secretary of the Treasury. It 
may rediscount for solvent national or State banks and make 
loans to the same upon satisfactory securities. It may also 
buy or sell United States bonds and such other high-class 
bonds and securities as may be acceptable to the general coun- 
cil or to any committee thereof specially designated by the 
general council to pass upon the same. It shall not loan upon 
real estate, mortgages on real estate, or the capital stock of 
national or State banks or trust companies, nor shall it pur- 
chase or discount bills of exchange on foreign countries, 
unless the same be secured by grain, cotton, or other convert- 
ible property, or by at least three reputable and solvent signers 
in good standing, or by a solvent incorporated bank. No loans 



APPENDIX 367 

or discounts shall be made by said bank which have longer 
than one hundred and twenty days to run after date of pur- 
chase or discount by said bank. It shall at all times keep on 
hand in United States gold coin or any gold or silver certificates 
or in United States notes a sum equal to forty per centum of 
its demand deposits. 

Sect. 7. That from the net earnings or profits of the Cen- 
tral National Bank of the United States in any one year a 
dividend of four per centum may be paid to the stockholders. 
Any excess profits equal to two per centum of the capital stock 
of the bank shall be set aside for a surplus fund of the bank, 
and any further excess, amounting to not less than two per 
centum of the capital, shall be divided equally between the 
Treasury of the United States and the shareholders of the 
Central National Bank of the United States. 

Sect. 8. That the Comptroller of the Currency shall appoint 
four inspectors skilled in accounting and credits, who shall 
make examination of the said bank and its branches as often 
as in the judgment of the Comptroller it may be necessary, 
the said inspectors to report to the Comptroller the condition 
of the bank and its various branches, showing the amount of 
loans, their character, reserve on hand, and its general con- 
dition, and the reports of the said inspectors shall be published 
at least once each week in at least two daily newspapers in 
the city of Chicago. 

Sect. 9. That the general council shall have authority, 
with the approval of the Secretary of the Treasury, to estab- 
lish branches of the Central National Bank in any reserve or 
central reserve city, and at such other points as may be deemed 
advisable in the judgment of the general council, with the 
approval of the Secretary of the Treasury. 

Sect. 10. That the by-laws of the Central National Bank 
of the United States shall be prepared by the governor of the 
bank, to be approved by the general council and the Secre- 
tary of the Treasury. 



363 APPENDIX 

H. R. 13845 
IN THE HOUSE OF REPRESENTATIVES 

January 15, 1908 

Mr. Fornes introduced the following bill; which was referred 
to the Committee on Banking and Currency and ordered 
to be printed. 

A BILL PROVIDING FOR THE ESTABLISHMENT OF THE UNITED 
STATES NATIONAL BANK OF AMERICA, IN THE CITY OF 
WASHINGTON, DISTRICT OF COLUMBIA. 

Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled: 

That there shall be established in the city of Washington, 
District of Columbia, the United States National Bank of 
America, with a capital of one hundred million dollars, 
consisting of one hundred thousand shares of stock at one 
thousand dollars a share, to be disposed of in the following 
manner: The United States Treasury to purchase, at par, 
three-fifths of said stock, the funds for said purchase and 
ownership to be derived from the sale of sixty million dollars 
of United States gold bonds, payable in fifty years, and bear- 
ing an interest at the rate of three per centum per annum, 
and to be designated "United States currency bonds"; the 
remaining two-fifths of the said shares of stock may be 
offered at not less than par to the national banks, each in pro- 
portion to the total of its combined capital and surplus at the 
time of the purchase of said shares of stock, and to be paid 
for in gold coin: Provided, That if said shares of stock are 
sold at a premium, said premium shall be credited to the sur- 
plus account of the United States National Bank of America. 

Sect. 2. That the said United States National Bank of 
America shall commence business on the first day of Sep- 
tember in the year nineteen hundred and eight, and shall 
cease to exist on the first day of September in the year nineteen 
hundred and fifty-eight: Provided, That Congress may at any 



APPENDIX 369 

time extend the life of the said United States National Bank 
of America beyond the day and date last named in this Act. 

Sect. 3 . That a branch of the said United States National 
Bank of America shall be established and maintained in each 
of the hereinafter named cities, which are hereby designated 
" Central reserve cities": The city of New York, in the State 
of New York; the city of Chicago, in the State of Illinois; 
the city of New Orleans, in the State of Louisiana; the city 
of Boston, in the State of Massachusetts; the city of Denver, 
in the State of Colorado; the city of Saint Louis, in the State 
of Missouri; the city of Atlanta, in the State of Georgia; 
the city of San Francisco, in the State of California; the 
city of Cincinnati, in the State of Ohio the city of Portland, 
in the State of Oregon. 

Sect. 10. That the United States National Bank of Amer- 
ica, or any of its branches, shall not participate in any syn- 
dicate or under writings, and no member of the board, officer or 
employee of the United States National Bank of America, 
or any of its branches, shall be permitted, either as individuals, 
or members of a firm, or members of a corporation, to borrow 
the funds from the said United States National Bank of Amer- 
ica, or any of its branches. Any violation of this provision 
shall be punishable by imprisonment for not less than ten 
years, and a fine of not less than five thousand dollars for 
each offense. 

Sect. ii. That upon the organization of the United States 
National Bank of America, as provided for in this Act, it 
shall issue one hundred million of dollars demand notes in 
the form of currency as printed according to law, and they 
shall be redeemable on demand, in gold coin, at the United 
States National Bank of America, or any of its branches. 
The capital of the United States National Bank of America, 
as provided for in this Act, shall be used for the redemption 
of said demand notes. That any commercial bank, char- 
tered or incorporated according to the Federal or State laws 



370 APPENDIX 

with an unimpaired capital and a surplus of not less than 
twenty-five per centum of its capital, shall have the privilege 
to obtain for legitimate business of such bank such an amount 
of the notes of the United States National Bank of America 
as the board of directors may approve upon the payment of 
one-eighth of one per centum tax on the amount, and thereafter 
interest at the rate of four per centum per annum for the time 
such notes are retained, not to exceed one year at any one time, 
and upon depositing with the United States National Bank 
of America a sufficient amount of security on the basis of ninety 
per centum of their par value, such securities to be of not less 
than par value, when offered, and of the class which are a 
legal investment for the savings banks of the State of New 
York, or the State of Massachusetts, or either of these States: 
Provided, however, That no real estate security, or securities, 
shall be accepted. The security, or securities, shall be re- 
turned to said depository bank when the amount of the bank 
notes are returned to the United States National Bank of 
America, or any of its branches, and the interest thereon paid 
for the period, of the retention of them. 

Sect. 12. That the board of directors may, by a vote of 
twenty of its members, issue additional notes of the United 
States National Bank of America in any amount not exceed- 
ing four hundred millions of dollars. Said notes to be avail- 
able for the business of the banks named in section ten of 
this Act upon the same class of securities and percentage basis 
thereof, but the amount so granted shall not exceed fifty per 
centum of the capital of the bank entitled to such notes, and 
the terms for such demands shall be the tax, as designated 
in section ten of this Act, and interest at the rate of six per 
centum per annum for the first amount of ten per centum 
of the capital of the bank so granted, seven per centum per 
annum on the second amount of ten per centum of the cap- 
ital of the bank so granted, eight per centum per annum on 
the third amount of ten per centum of the capital of the bank 
so granted, nine per centum per annum on the fourth amount 



APPENDIX 371 

of ten per centum of the capital of the bank so granted, 
and ten per centum per annum on the fifth amount of ten 
per centum of the capital of the bank so granted. The re- 
turn of the securities and payment of the interest shall be as 
described in section ten of this Act. It may rediscount, for 
banks named in section ten of this Act, for a period not ex- 
ceeding three months, and when said bank indorses such paper 
and gives satisfactory security. It may advance money to 
and receive deposits from the Government of the United States 
at such rate of interest as may be established by the board of 
directors with the Government. 

Sect. 13. That the Comptroller of the Currency, with 
the approval of the board of directors, shall appoint a suffi- 
cient number of fully qualified inspectors whose duty it shall 
be to carefully inspect and report to the board of directors 
the solvency and legality of the business methods of any bank 
having or desiring to have business relation of whatever 
nature with the United States National Bank of America or 
any of its branches. Such inspections to be made at least 
twice in each and every year during such business relation, 
or whenever the Comptroller of the Currency may direct, or 
at the request of the board of directors. That the salary and 
allowances of such inspector shall be fixed by the board of 
directors. 



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